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EUR/USD rate outlook: Euro Area CPI report in focus


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Fresh data prints coming out of the Euro Area may generate a rebound in the exchange rate as the Consumer Price Index (CPI) is anticipated to show higher inflation.

1661820565684.jpg
Source: Bloomberg
 
 

EUR/USD rate outlook: euro area CPI report in focus

EUR/USD appears to be bouncing back ahead of the monthly low (0.9900) as it attempts to retrace the decline following the speech by Federal Reserve Chairman Jerome Powell, and the European Central Bank (ECB) may come under pressure to carry out a similar approach as Chief Economist Philip Lane reveals that the “upcoming September monetary policy meeting will be the start of a new phase.”

1661820597148.pngSource: DailyFX

As a result, the update to the Euro Area CPI may spark speculation for larger ECB rate hikes as the core rate of inflation is expected to increase to 4.1% in August from 4.0% per annum the month prior, and evidence of rising price pressures may lead to a near-term rebound in EUR/USD as Governing Council member Lane insists that “this new phase will consist of a meeting-by-meeting (MBM) approach to setting interest rates.”

In a recent speech, Lane argues that “a steady pace (that is neither too slow nor too fast) in closing the gap to the terminal rate is important for several reasons,” and it remains to be seen if the ECB will change its tone at the next meeting on September 8 as “the scale and timeline of rate adjustment will be determined by the evolution of the terminal rate and the appropriate speed in closing the gap between the current rate and the terminal rate.”

Until then, an uptick in the Euro Area CPI may keep EUR/USD above the monthly low (0.9900) as it encourages the ECB to normalize monetary policy at a faster pace, and a rebound in the exchange rate may help to alleviate the tilt in retail sentiment like the behavior seen earlier this year.

1661820615578.pngSource: DailyFX

The IG Client Sentiment report shows 63.01% of traders are currently net-long EUR/USD, with the ratio of traders long to short standing at 1.70 to 1.

The number of traders net-long is 4.10% lower than yesterday and 15.68% lower from last week, while the number of traders net-short is 38.96% higher than yesterday and 50.22% higher from last week. The decline in net-long interest has alleviated the crowding behavior as 72.35% of traders were net-long EUR/USD last week, while the jump in net-short position comes as the exchange rate trades within last week’s range.

With that said, EUR/USD may stage a rebound over the coming days amid the failed attempt to test the December 2002 low (0.9859), but the exchange rate may continue to track the negative slope in the 50-Day SMA (1.0204) to largely mirror the price action seen in June.

EUR/USD rate daily chart

1661820650078.pngSource: TradingView
 
David Song | Analyst, DailyFX, New York City
30 August 2022

This information has been prepared by DailyFX, the partner site of IG offering leading forex news and analysis. In addition to the disclaimer below, the material on this page does not contain a record of our trading prices, or an offer of, or solicitation for, a transaction in any financial instrument. IG accepts no responsibility for any use that may be made of these comments and for any consequences that result. No representation or warranty is given as to the accuracy or completeness of this information. Consequently any person acting on it does so entirely at their own risk. Any research provided does not have regard to the specific investment objectives, financial situation and needs of any specific person who may receive it. It has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such is considered to be a marketing communication. Although we are not specifically constrained from dealing ahead of our recommendations we do not seek to take advantage of them before they are provided to our clients.

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TO BE OR NOT TO BE

by SKYREACH, IG client, 30 August 2022

The EU Commission has been in denial of inflation pressures despite the real world events taking place around them for some months. Now they may be forced to act by these events.

The EU, like some other countries are ALREADY IN A RECESSION BY ALL DEFINITIONS. In the EU Commission's case it is,behind the scenes, more worried about the servicing of the huge debts of southern member states as that goes up with the rise in rates. So various metric tools are used to justify a delay in handling the rampant inflation rise. Now, this may be a wrong assessment, then they are still TOO SLOW ACTING ON RATES, OR EVEN IN REDUCING THE MONEY SUPPLY SUFFICIENTLY. TOO LITTLE TO LATE TO HANDLE WHAT IS IN FRONT OF THEM.

As my previous several blog have stated, that it is the CONTROL OF THE MONEY SUPPLY THAT NEEDS TO BE ADDRESSED, NOT JUST THE INTEREST RATE.

Not all economic metrics are going show “recession indicator” SINCE MANY LAG and each sector of the economy has its own dynamics until they too get pulled down. It IS WEIRD HOW ECONOMISTS AND CENTRAL BANKS, AS PROFESSIONALS, DO NOT UNDERSTAND THIS. Still, overall I believe central banks are aware of this and have all the metrics in front of them but the assessment is faulty. Hence the reason why they are slow to act, or it is s too little too late, or just ineffective in handling the situation. Time will show which of these plays out the most. See my recent blog, “FINANCIAL CONDITIONS RED ALERT”.

Also governments (which includes the permanent mandarins) are impotent in handling the economic and financial side of activities. It is dismal. On the one hand they are reliant on financiers and central bank advise and actions, whilst they remain confused and glib in knowing the real state of business conditions (not macro-level), inability to handle malpractices, historic debt-levels they helped and allowed to continue, and what the abuse of over supply of money can do to the economy. Upping the positive sound bites ( false positive PR) will NEVER MAKE THE SITUATION GO AWAY, e.g. US government (mid-term politics) refuting any recession even though it is, by agreed upon definitions. The latter is just wishing things to go away instead of DOING SOMETHING about it correctly.

All central banks failed to act fast in a timely fashion. Now FED chief Jerome Powell is being straight forward and honest of the recession that is in its beginning stages. ALL CENTRAL BANKS KNOW TOO WELL THE EFFECTS OF INCREASING THE RATES ON HISTORIC LEVELS OF DEBTS PILED UP BY INDIVIDUALS, COMPANIES, FEDERAL STATES, AND COUNTRIES. It WILL mean DEFAULTS and maybe some bank failures (as they took too high a risk that cannot be measured easily).

FOR THESE REASONS I believe a deep recession will take hold down the line. The markets are in early stage bear market, I believe. The FED chief has admitted recession will be too now. And the solution is? It is NOT another QE. That would prolong the economic agony with an apparent ointment that will not handle the primary “disease”. That would be adding more petrol to the fire.

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