EUR/USD Stymied on Strong Growth,Weak Inflation Backdrop

Talking Points

- The single currency moved either side of unchanged on conflicting growth and inflation data.

- The ongoing political crisis in Catalonia will continue to weigh on the EUR.

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The Euro-Zone economy grew by a better-than-expected 0.6% in Q3, forcing up annual growth to a robust 2.5% while the unemployment rate in the zone fell to 8.9% from a prior, revised, 9.0%.

Inflation however failed to cheer the market with the core rate falling to 0.9% in October, against expectations and a prior reading of 1.1%, while headline inflation slipped to 1.4% against expectations and a prior reading of 1.5%.

The inflation data will make difficult reading for ECB President Mario Draghi who last week cut the monthly amount of bonds the central bank will buy but extended the period over which they will buy them. With sufficient price pressure yet to be seen in the single zone, expectations of any rate hikes by the ECB will be pushed back further into 2019, leaving the EUR vulnerable to further bouts of weakness.

On the charts, the single currency continues to look vulnerable, according to DailyFX analyst Paul Robinson, after the neckline of the head and shoulders pattern was broken at the end of last week.

Chart: EURUSD Three Minute Timeframe (October 31, 2017)

Chart by IG

And the single currency may come under further bouts of downside pressure as the crisis in Catalonia escalates. On Monday, Madrid took over control of the region’s police force and government ministries, while the Spanish prosecutors readied charges of rebellion and sedition against Catalan’s leaders. In response, several ministers, including Catalan President Carles Puigdemont, fled to seek asylum in Brussels, to avoid the charges which carry a maximum prison sentence of up to 30 years. Puigdemont’s asylum in Brussels could also sour the diplomatic relationship between Spain and Belgium, as well as within the EU, whose member states have supported the Spanish government in the ongoing constitutional crisis.

For those with a bullish EUR persuasion, the latest IG Client Sentiment data show that retailtraders are short of the single currency. We typically take a contrarian view to crowd sentiment, and the fact traders are net-short suggests EURUSD prices may continue to rise. Traders are further net-short than yesterday and last week, and the combination of current sentiment and recent changes gives us a stronger EURUSD-bullish contrarian trading bias.

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--- Written by Nick Cawley, Analyst

To contact Nick, email him at nicholas.cawley@ig.com

Follow Nick on Twitter @nickcawley1