Euro and US dollar:
- Euro-Zone economic growth deteriorates.
- EURUSD touches a fresh two-month low.
- Italian bond yields nudge higher.
- US Dollar Basket (DXY) rallies.
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EURUSD Under Increasing Downside Pressure
The latest IHS Markit Euro-Zone PMIs will make uncomfortable reading for Mario Draghi ahead of Thursday’s ECB meeting with the composite index missing expectations and falling to a 25-month low of 52.7 compared to last month’s 54.1. And according to Markit, economic growth in the Euro-Zone is slowing down sharply.
‘The pace of Eurozone economic growth slipped markedly lower in October, with the PMI setting the scene for a disappointing end to the year. The survey is indicative of GDP growth waning to 0.3% in the fourth quarter, and forward-looking indicators, such as measures of future expectations and new business inflows, suggest further momentum could be lost in coming months' wrote Chris Williamson, chief business economist at IHS Markit. The slowdown is being led by a drop-in exports, linked to trade wars and tariffs, ‘which appear to have darkened the global economic environment and led to increased risk aversion.’
And ominously for the ECB Williamson added, ‘the headline PMI has fallen to a level that would historically be consistent with a bias towards loosening monetary policy in order to prevent any further deterioration of economic growth’.
Italian Bond Yields Remain Elevated; US Dollar Strengthens
Italian government bond yields remain near their multi-year highs after the EU Commission recently rejected the country’s contentious budget plan. The Italian government in reply said that the budget was designed for Italians and not for Brussels, leaving the way open for renewed disagreement – and higher yields - between the two over the next few weeks. The 10-yr Italian government bond currently yields 3.55%, up from 1.73% at the start of May this year.
Italian Bond Yields Lower but Euro Remains Weak – October 23.
EURUSD is also coming under pressure from an increasingly strong US dollar, buoyed by anticipation of further interest rate hikes in 2018 and 2019. The US dollar basket (DXY) currently trades at 95.82, near its recent multi-month high at 96.60. EURUSD is targeting the August 15 swing-low at 1.13010 – itself a 16-month low - before the 61.8% Fibonacci retracement of the January 2017/February 2018 rally at 1.1187 comes into play.
US Dollar (DXY) Touching a Two-Month High – October 23.
IG Client Sentiment Data show investors are currently 60.8% net-long EURUSD – a contrarian bearish signal – but recent daily and weekly positional shifts give us a stronger bearish EURUSD bias.
EURUSD Daily Price Chart (April 2017 – October 24, 2018)
Traders may be interested in two of our trading guides – Traits of Successful Traders and Top Trading Lessons – while technical analysts are likely to be interested in our latest Elliott Wave Guide.
What is your view on EURUSD – bullish or bearish?? You can let us know via the form at the end of this piece or you can contact the author at nicholas.cawley@ig.com or via Twitter @nickcawley1.
