All eyes on the Euro and Australian GDP

The EURUSD has commenced the week by recording a fresh 2014 low (1.3184) with a combination of geo-political tensions in Eastern Europe heightening the possibility of further Russian economic sanctions, alongside Friday’s news that EU CPI dropped to its lowest level in 5 years (with Italy CPI contracting) weighing on the EU currency.

The one week deadline awarded by EU leaders in Brussels on Saturday for Russia to defuse the emerging conflict in Ukraine should slow EURUSD weakness, so those hoping for EURUSD softness will be looking for the EU fundamentals to encourage economic concerns. On Wednesday, a variety of EU Services PMIs are announced, alongside EU Retail Sales. On Thursday morning, the latest German Factory Orders will come under the spotlight before the ECB interest rate decision and Mario Draghi’s press conference on Thursday afternoon.

In regards to the ECB decision, French Prime Minister Manuel Valls recently called for further action from the ECB to devalue the EU currency and the emergence of deflation in Italy has increased speculation of further ECB stimulus. However, those hoping for ECB action this week could be left disappointed, with it being suggested that a fall in energy prices alongside an oversupply of Oil could have correlated towards inflation levels edging lower in August. If the ECB unexpectedly acts this week, a further interest rate cut seems the most likely possibility. The possible introduction of QE is something that might occur at a later date. The ECB will require confirmation that the EU is staring directly at deflation, rather than encountering even lower CPI levels due to a fall in energy prices.

As usual, Mario Draghi’s press conference following the ECB interest rate decision will be watched closely. The ECB president will more than likely be heavily quizzed for his opinion regarding worsening EU economic data, alongside a possible timeframe for an introduction to QE. Following calls for an even lower valued EU, a dovish speaking Draghi could appear on Thursday afternoon. If this occurs, bearish movement in the EURUSD will increase. The 6th September 2013 low can be located at 1.3104 with further EURUSD support levels found around 1.3083 and 1.3055.

The Aussie is another candidate for increased volatility, with the latest Reserve Bank of Australia (RBA) interest rate decision, Building Approvals, GDP and a speech from Governor Stevens all scheduled. In regards to the RBA decision, it is largely expected that the central bank will keep monetary policy unchanged. Those looking for bearish movement in the AUDUSD will be hoping for a dovish closing monetary policy statement, perhaps reiterating that the AUDUSD remains overvalued. The Building Approvals release will also be firmly under the microscope, with the Australian economy remaining under pressure to move away from mining/exports reliance and transition towards domestic consumption. Last month, a monthly 1.9% Building Approvals contraction inspired AUDUSD selling and a repeat performance will raise anxiety for Wednesday’s GDP release.

The Australian GDP release is the most likely of the data announcements to inspire AUD volatility. Since around April, the RBA have expressed on several occasions that the Australian economy is set to enter a period of weaker economic growth, due to an expected decline in its mining industry. Additionally, Governor Stevens has frequently suggested that investors were underestimating the risk of a significant drop in the AUD currency. If the AUD is set for a decline, a weaker than expected GDP release on Wednesday will be required.

Investors will be paying very close attention towards what contribution the mining sector provided to the Australian GDP in the previous quarter, following the Australian economy receiving criticism for the sector accounting for 0.9% of 1.1% Q1 GDP growth. Similarly, investors will also be paying attention towards whether the Australian economy is improving domestic consumption.

If the GDP release confirms previous RBA warnings that the Australian economy is set to enter weak economic growth, AUDUSD support levels can be found at 0.9323, 0.9306, 0.9285 and 0.9271. Also, if AUD weakness is forthcoming, there might be an opportunity for the AUDNZD to pullback slightly after appreciating by 200 pips in August. In which case, potential support levels can be found at 1.1067, 1.1049 and 1.0955.