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EUR/USD May Fall as Weak German Inflation Negates Solid EZ Growth

EUR/USD May Fall as Weak German Inflation Negates Solid EZ Growth

Nick Cawley, Strategist

EUR News and Talking Points

- Euro-Zone preliminary Q4 GDP grows at a robust 0.6% q/q and 2.7% y/y.

- Below target German inflation may keep the pressure on the ECB to keep monetary conditions accommodative.

Check out our new Trading Forecasts - they’re free and have been updated for the first quarter of 2018.

ECB’s Hands Tied as The Gap Between Growth and Inflation is Likely to Remain Wide

The first release of Euro-Zone Q4 GDP showed the single-bloc’s economy growing at a decent lick, up 0.6% q/q and 2.7% on a year-on-year basis, while the previous quarter’s numbers were upgraded a notch to 0.7% and 2.8% respectively. A positive set of figures that are likely to be seen throughout 2018 as the Euro-Zone economy continues to grow and figures that will fuel calls for the central bank to set out a timetable for ending QE, sooner rather than later.

In contrast, the latest look at inflation in Germany, the bloc’s largest economy, will disappoint with annual CPI falling to 1.6% in January from 1.7% in December, according to provisional data. And HICP data was even worse, falling to 1.4% from 1.6% in the previous month. The lack of price pressure in Germany is likely to be a reflection of the Euro-Zone as a whole and will push back expectations for a rate hike well into 2019.

EUR/USD slipped on the German release to just over 1.24140 but still remains over 4 cents higher than the opening price of 2018. The pair’s strength is a reflection of both the strength of the EU economy and the weakness of the US dollar.

EUR/USD Price Chart Five Minute Timeframe (Tuesday, 30 January 2018)

Chart by IG

EUR/USD Sentiment Data Points to Lower Prices

IG Client Sentiment data show 36.4% of traders are net-long with the ratio of traders short to long at 1.75 to 1. In fact, traders have remained net-short since Apr 18 when EURUSD traded near 1.05353; price has moved 17.9% higher since then. The number of traders net-long is 15.5% higher than yesterday and 7.8% higher from last week, while the number of traders net-short is 3.6% lower than yesterday and 7.9% lower from last week.

We typically take a contrarian view to crowd sentiment, and the fact traders are net-short suggests EURUSD prices may continue to rise. Yet traders are less net-short than yesterday and compared with last week. Recent changes in sentiment warn that the current EURUSD price trend may soon reverse lower despite the fact traders remain net-short.

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--- Written by Nick Cawley, Analyst

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

Follow Nick on Twitter @nickcawley1

DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.

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