The preliminary set of Q3 Eurozone GDP figures were underwhelming as the year-over-year growth rate was expected to come in at 1.7% but instead posted 1.6%. The quarter-over-quarter reading was woeful at 0.3%, slipping back from the prior observation of 0.4%.
In combination with much anticipation for an accommodative December from the European Central Bank and the prospect of the Federal Reserve commencing the breakaway from zero rates, there is little to support the euro at present.
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ECB president Mario Draghi struck a dovish tone as he testified to the EU parliament yesterday, and all but confirmed a stimulus expansion at next month’s policy meeting.
He said that “normalisation of inflation could take longer than anticipated,” adding that downside risks are “clearly visible” and warning that a “signs of a turnaround in core inflation have weakened”.
I would urge him to stop clinging so blindly to the internal inflationary forecasts that have been misguided for 18 months. This is what he did for too long before moving to a negative deposit rate. It is also the same story before he finally approved the initial quantitative easing programme
Of course, forex markets are skittish and can be highly volatile. So for a short period of time the EURUSD will find a tiny amount of upside drift… I cannot call it momentum as the retail sales data from the US for October have not met expectations (although they are better than in September).
- Headline Retail Sales October: Actual 0.1% Expected 0.3% September 0.1%
- Core Retail Sales October: Actual 0.2% Expected 0.4% September minus 0.4%
- Retail Sales ex gas and auto: Actual 0.3% Expected 0.4% September 0.0%
I am short of the euro against the Dollar and while I am not personally adding to my short I am minded to start targeting a slide toward parity.
The monetary policy divergence has been well documented but also the Eurozone has two national trouble spots in Greece and Portugal; come December it may also be that Spain, the bloc's fourth largest economy, will be run by a left-of-centre coalition who oppose the austerity programme and seek to be cavalier with borrowing and spending.
Draghi has a hard mandate to ever get inflation back to 2.0%, I cannot see him doing it for at least the next two years. I have no desire to be long of the euro against the USD until parity is printed.
EURUSD five-year chart:
Management and risk:
I am already short from October 20 at 1.1374. All my downside targets have been achieved but now I want more.
Targets: 1.0530… 1.0360… 1.1025… 1.0000
Profit Protection: 1.0900
— Edited by Michael McKenna
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