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EURUSD jumped on broader weakness in US dollar despite a soft EZ core inflation

calendar 04/05/2018 - 02:47 UTC

EURUSD closed around 1.1989 in US session on Thursday; jumped by almost 0.32% on broader weakness in US dollar amid “symmetrical” inflation view by Fed coupled with renewed concern about US-China trade war. EURUSD made high of 1.2009 even after a soft EZ core inflation data. On Wednesday, EURUSD made a knee-jerk high of 1.2033 soon after the “dovish hold” by Fed, but eventually, it retraced again to close around 1.1951, slumped by 0.35% on market confusions regarding some changes in the FOMC statement.

ECB may be now worried about an EZ deflation:

On Thursday, EZ core CPI for April slumped to 0.7% from prior 1% against an estimate of 0.9% (Y/Y). The core CPI figure of 0.7% is way below ECB’s target of “slightly below 2%” and may also a cause of concern for the EZ deflation, whereas on the opposite side, Fed is now concerned over US inflation. The April core CPI of 0.7% is the slowest pace of price increase in more than a year (13 months). The slow pace of inflation is dovish for ECB monetary policy and boosted European government bunds as the 10Y German bund yield fell to a multi-week low of 0.525%.

The Eurozone March PPI was unchanged at 0.1% and right on the expectations (M/M), while on Y/Y basis, the March PPI improved to 2.1% from 1.6%, also right on the expectations. While the price pressure (inflation) is now almost non-existent for the EZ economy, the market took some solace from the fact that it may be a function of a stronger EUR (low imported inflation) and thus we may see better CPI numbers in the days ahead, considering the recent plunge of EUR from 1.25 level to 1.20.

But, still, ECB may be on the “mute” mode in the coming months at least till July meeting to assess the Q2 economic data before committing full QE tapering BY Dec’18 and subsequent rate hikes in H2-2019.

Meanwhile, ECB’s chief economist Praet “reaffirmed” that EZ economic data points to the moderation of Euro economy and thus a patient, persistence and prudence monetary policy is required. ECB must keep up monetary stimulus as inflation developments remain subdued although there is substantial progress towards the path of inflation. As a reminder, Praet is a known ECB dove and thus his dovishness is not surprising at all.

In other ECB talks, on Thursday, Villeroy tried to look optimistic and played down the soft Q1 EZ economic data in line and spirit with Draghi & Co by commenting that slower French Q1 growth is not a surprise. Similarly, in line with ECB optimism, the European Commission (EC) has also raised 2018 Spain GDP projection to 2.9% from 2.6% earlier.

But the market may be still concerned about deflationary trend in the EZ economy despite Q1 seasonal factors such as harsh winter, German flu etc. but may also give another opportunity to Draghi & Co to justify their optimism in Q2, supported by summer season and some weakness in EUR, beneficial for the export savvy EZ economy.

Elsewhere, on the Italian political saga, a fresh election seems inevitable as a majority of Italian Democratic Party leaders oppose a Salvini or Di Maio-led government. Although the Italian President Mattarella wants a new government in order to pass 2019 budget and rules out June elections, 5 Star Movement leader Di Maio said a government is not possible with the center-right; i.e. a paralyzing political bizarre or rainbow coalition government is not going to work in Italy either.

Technical View (Positional):

Technically whatever may be the ECB narrative, EURUSD now needs to stay above 1.19150; otherwise, it may further fall to 1.18450/1.18050-1.17780/1.16750 and 1.15500-1.14850. For any meaningful recovery, EURUSD must stay over 1.21000-1.21600 for 1.22000-1.22350-1.22500 and further 1.23100/1.23550-1.24200/1.24600 and even 1.25050 in the coming days. Any technical bounce back (short covering) till 1.20600-1.20800 may be a dead cat bounce for the EURUSD as of now.


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