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EURUSD Threatens to Test Crucial Support as Growth Tilts to Downside

EURUSD Threatens to Test Crucial Support as Growth Tilts to Downside

2018-10-30 10:40:00
Justin McQueen, Analyst

EUR Analysis and Talking Points

  • Eurozone Growth Risks Tilted to the Downside
  • Italian Growth Stagnates
  • ECB to Cut Growth Forecasts in Staff Projections
  • German Inflation May Stem Euro Losses

Check out the brand new Q4 FX forecast guides

Eurozone Growth Risks Tilted to the Downside

The first insight into Q3 growth in the Eurozone showed a drop to 1.7% from 2.1%, falling below estimates of 1.8% with a quarterly rise of 0.2%. This report is consistent with the theme that growth in the Eurozone is slowing with uncertainty in Germany posing downside risks to the growth outlook. Last week’s PMI had also highlighted the weakness in the Eurozone with IHS Markit noting that the slowdown is being led by a drop-in exports, linked to trade wars and tariffs.

Italian Growth Stagnates

Earlier, Italian Q3 growth statistics underwhelmed analyst estimates with the economy stagnating for the first time since Q4 2014. This will provide a blow to the Italian government, whose growth projections in their budget are seemingly far too optimistic. However, at the same time it will strengthen their calls that they need an expansive budget in order to invest more and subsequently support growth.

ECB to Cut Growth Forecasts in Staff Projections

Given the continued deterioration in the growth outlook, expectations are on the rise that the ECB will lower its growth forecasts in the staff projections at the December monetary policy meeting.

Additional Reading

Eurozone Debt Crisis: How to Trade Future Disasters – Martin Essex, MSTA, Analyst and Editor

German Inflation May Stem Euro Losses

Thus far, German state inflation suggests possible upside risks to the national German CPI reading with the Saxony CPI rising 2.5% from 2.3%, which marks the highest figure since 2008. This is also above the expected reading for the national print, which is seen rising 2.4%, whereby a match would see German inflation rising at its fastest pace since November 2011. Although, with Germany’s most populous state North Rhine-Westphalia reporting a yearly rate of 2.4%, the headline figure may be more skewed to 2.4%. This in turn, could reinforce the ECB’s plan to end bond purchases by the year-end and look to provide guidance on the first-rate rise.

Euro Approaches Key Support at 1.13

Key support in the Euro is situated at the 1.13 handle, which marks the YTD low. While near term topside resistance resides at the 1.14 handle (1.4bln worth of vanilla options) and 1.1430. A break below 1.13 could open up a move towards the 1.1180 level, whereby the 61.8% Fibonacci retracement of the 1.0340-1.2555 rise comes in at. Month-end rebalancing poses downside risks to the Euro with bank models implying that signals point to strong USD buying.

EURUSD PRICE CHART: Daily Time-Frame (May-Oct 2018)

EURUSD Threatens to Test Crucial Support as Growth Tilts to Downside

Chart by IG


--- Written by Justin McQueen, Market Analyst

To contact Justin, email him at Justin.mcqueen@ig.com

Follow Justin on Twitter @JMcQueenFX


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