EURUSD: The Night is Darkest Just Before the Dawn

The final trading week before the unofficial end of summer (US Labor Day Holiday) has officially kicked off, and the initial gap lower in EURUSD fits this rest of the summer’s script to a “T”. Over the last two months, the world’s most widely-traded currency pair has collapsed nearly 500 pips in a straight line down, culminating in a 50-pip bearish gap to start this week.

Rates are now trading at an 11-month low, and EURUSD traders’ sentiment could hardly be more dour. To wit, the CFTC’s Commitment of Trader report showed that speculators increased net short positions on the pair to a multi-year bearish extreme. Adding insult to injury, today’s German IFO Business Climate survey fell further than expected to a new 13-month low of just 106.3. Even more worrying, the future expectations component of the report dropped to just 101.7, suggesting that businesses believe the German economy will get much worse before it gets any better. From a fundamental perspective, it would be difficult for the euro’s position to appear any worse.

As the saying goes, “the night is darkest just before the dawn,” and while we don’t necessarily see any imminent improvement in the fundamentals, the limited reaction to today’s IFO report suggests that the selling pressure may be reaching exhaustion. Rates dipped only about 20 pips on the initial headline, and the EURUSD has already recovered its losses to trade back around the 1.3200 handle.

If EURUSD manages to clear today’s high around 1.3210, the pair could go on to fill its weekend gap up to 1.3240 or even stretch toward Friday’s peak near 1.3300. While the stage is set for a dead cat bounce, there is may still be the risk of further downside toward the 1-year low near 1.3100, pending the US data early this week and the Eurozone’s highly-anticipated CPI report on Friday.

Key Economic Data that May Impact EURUSD This Week (all times GMT):

Ø Today: US New Home Sales (14:00)

Ø Tuesday: US Durable Goods Orders (12:30), US Case-Shiller Home Price Index (13:00), Conference Board Consumer Confidence (14:00)

Ø Wednesday: GfK German Consumer Climate (6:00)

Ø Thursday: German Preliminary CPI (tbd), German Unemployment (7:55), US Preliminary GDP and Initial Unemployment Claims (12:30)

Ø Friday: German Retail Sales (6:00), Eurozone Flash CPI (9:00), US Core PCE Price Index (12:30), Chicago PMI (13:45)