A further blow for the EU economy, while USDJPY pulls back

The EU economy just can’t catch a break at the moment. Following the announcement on Tuesday that EU CPI slipped to its slowest rate in nearly five years resulting in the Eurodollar declining by over 130 pips, I was expecting a quieter day at the office before the ECB decision on Thursday and the US NFP on Friday. The opposite occurred with more disappointing news causing European economic sentiment to worsen again on Wednesday morning. This was then followed-up with some mixed data from the United States during the afternoon session; the ADP employment report surprised to the upside and indicated 213,000 jobs were created by the US economy in September. However, this was shortly followed by the Manufacturing ISM missing forecasts, which encouraged some Greenback profit taking.

Starting with the EU, movement in the currency markets was reduced following the French government confirming it will cut its budget deficit below 3% of GDP two years later than promised. However, the Euro bears couldn’t refuse the opportunity to wake up when an unexpected manufacturing contraction from Germany was announced. This raised fears again that the EU economy was stagnating and sent the EURUSD around 40 pips lower, marginally above Tuesday’s two-year low (1.2570).

This unexpected development in Germany will add further pressure on the ECB to increase measures to reinvigorate the EU economy this afternoon, though I remain unconvinced Draghi will act again today. Instead, the ECB will probably provide the Eurodollar at least one month to see if the weaker exchange rate can improve economic performances. If the ECB are confident a weaker exchange rate can improve economic fortunes, then alarm bells ringing in Germany (who contribute 30% of the EU GDP) will certainly lower the euro.

Despite the UK’s impressive fundamentals being showcased again with second quarter GDP being revised upwards to 0.9% lifting the pair as high as 1.6286 on Tuesday, the pair pulled back and hit the 1.6140 support level once again on Wednesday morning. A lack of progress in Westminster regarding Scotland and confirmation of the UK’s first airstrike against the Islamic State encouraged GBPUSD softness. However, there was a surprise when Wednesday’s Markit Manufacturing PMI unexpectedly missed expectations. This is a significant development to keep an eye out for because the survey suggested weakness in the Eurozone was now affecting UK manufacturing demand.

Back in August, Bank of England (BoE) Governor Carney suggested any UK rate rises “will be gradual and limited due to global economic headwinds elsewhere” and the latest Manufacturing Markit PMI has shown how the EU economic woes can impact the UK economy. Despite this, I still expect the BoE to move forward and raise rates as scheduled in Spring. The next UK election is scheduled for May 2015 and I expect the BoE will probably raise rates before then. The US Manufacturing ISM unexpectedly missing forecasts allowed the Cable to bounce from the 1.6164 support, and conclude trading at 1.6184.

The USDJPY’s failure to reach resistance around 110.270 proved costly with the pair pulling back to trade as low as 109.251 when the US Manufacturing ISM disappointed. Earlier in the morning session, the pair traded as high as 110.077 but its failure to reach 110.270 suggests the pair is now at risk of a substantial pullback. Both the Stochastic Oscillator and RSI are each indicating the pair is overbought and if Friday’s US employment report fails to impress and thus raise expectations that the Fed will transition to a hawkish bias sooner rather than later, the pair is likely to witness profit taking. Potential support levels for the USDJPY can be found at 108.688, 108.280 and 107.731.

The USD weakness failed to impact the USDCHF rally. The pair traded as high as 0.9595 after rumors circulated that the Swiss National Bank (SNB) had intervened and unofficially purchased the EURCHF, as a commitment to the 1.2000 price floor. Where this pair trades on Thursday really is dependent on how the markets react to the ECB interest rate decision. If the ECB unexpectedly acts or a dovish Draghi comment encourages investors to price in further stimulus, the USDCHF should surpass the 0.9610 resistance level. Nonetheless, if those expecting Draghi to strike again today are left disappointed and this results in Eurodollar purchasing, the USDCHF will likely find support around 0.9512.