A week not to take holidays?

I generally see the summer weeks of July and August as a calm period where the big players, investors and those who normally would be in a position to move EURUSD to be side-lined. It is a holiday season for many – also for them.

As such I like to think range trading for EURUSD – narrower than for other periods – for as long as there are not events – news and data releases – that has the potential to trigger some interest also among those normally staying off during these weeks.

The coming week has the potential for some more volatility and possibly also a testing of more critical levels – starting on Wednesday when we get German flash CPI for July, US 2nd quarter GDP and the FOMC statement from their meeting this week. 

German flash CPI for July is expected out at 0.8% - down from 1.0% in June. To me this consensus estimate looks a bit on the low side but even so I think there is limited euro weakness to be seen from a realised figure in line with consensus partly because consensus looks to be priced in and partly because I doubt even such a low rate would trigger anything different from the ECB in terms size and speed of implantation of measures. 

For the same reasons I see a bigger upside for EURUSD from a realised figure better than consensus estimate – especially if the June level should be met. A higher than expected inflation could trigger thoughts about whether or not the third measure – general asset purchases and euro printing – will be implemented at all. Add to this that the speculative part of the market is short and I will conclude that there is a substantial upside for EURUSD from higher German inflation.

US 1st quarter GDP was a big disappointment – first released at 0.1% and then later revised down to -1.0%. The 2nd quarter will be better but I see consensus estimate of 3.0% as being very high. Both ISM Manufacturing and ISM Composite have shown strong improvements from 1st to 2nd quarter and those are good indicators for GDP. But they are not up to the level of 2nd quarter 2013 and that to me is an indication that the estimate for 2nd quarter GDP is high. Even if I take other macros into account I simply do not see the consensus estimate for GDP being justified. 

As for German CPI I would think that the GDP estimate is priced in and as such it would have to be a better realised figure to strengthen USD further. And equally – should the figure disappoint – I think there is a bigger upside for EURUSD than the impact from a positive figure.

A positive ADP report – and I think there will be one – should be overshadowed by the GDP release unless we get into the 300K+ level. 

The last major event risk on Wednesday is the FOMC meeting. FOMC members will have the GDP figures available to them throughout the meeting and they could be influential to their decisions. GDP components and especially those of income and expenditures are now more important to FOMC members than the unemployment rate. Employment has progressed nicely but as pointed out by Janet Yellen a few times, you want to see earnings coming up and higher spending habits from these. You also want to see the housing market reviving more again. As such – GDP components could be critical to the FOMC statement – not only from decisions made – but also the wording in this paper should policies stay unchanged. The impact for EURUSD could be the same as the one seen for the GDP release earlier in the day with limited downside and much more risk to the upside.

I take the view that you need the combination of disappointing German CPI data, a US GDP release being as good as consensus estimate and a FOMC statement reflecting this in a more hawkish tone to see EURUSD lower – say to 1.3350. 

I also take the view that should German CPI data be higher than expected and US GDP data disappointing a bit, reflected in a normal neutral to dovish FOMC statement, then there is a substantial upside for EURUSD – possibly as high as 1.3600 that day and even back to 1.3650-1.3700 few sessions later.

Thursday might amend a bit of this outlook as the day contain Euro area flash CPI data for July. But those would have to contradict the German ones for the market to reverse anything of what happened Wednesday.

Friday we have US jobs reports and I am bullish for those. I think the weekly jobless claims numbers clearly indicate that the NFP could be good. If so – we might see some USD buying – but watch out for the monthly income and expenditure data. They have neutralised the impact from positive NFP releases a lot. Still – they could provide some support for USD should Wednesday be a tricky one for the currency.

I have seen 1.3450-1.3700 as the narrower range throughout this summer but as we are a few pips below the floor level I have extended the range to 1.3300-1.3700. 

From where we are at moment and further south towards 1.3300 is a long EURUSD position setup for me and I am keen to develop such positions ahead of Wednesday. The invalidation level for such long setups is the 1.3300 as a break below this level could open up for a wider move down to 1.3100. 

Shortening around today’s level is not an option for me. I like to see 1.3550 retaken before even considering doing so. 

It is a week with a lot of interesting releases and it could be one also for important outcome. Should anyone like to make a break from their holiday activities I would suggest Wednesday-Friday to be such days.