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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.

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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)

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

Chart by IG

EUR/USD Sentiment Data Points to Lower Prices

IG Client Sentimentdata 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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