The global growth slowdown in recent months has made Europe the center of pessimistic fundamental data. The high interest rates are putting a damper on economic activity to control inflation, but policy makers are cautious as they don’t want to trigger a recession. The euro area had negative growth of 0.3% in Q3 following a 0.2% expansion in Q2. This continuous contraction, accompanied by negative 0% in two quarters prior, indicates major headwinds for Europe. The EUR/USD tries to trade higher while remaining within an ascending channel, climbing above 1.0700 against the USD.
Given the weakening of data in the US, the recent softening positions EUR/USD to take advantage if CPI and retail sales weaken this week. The focus will be on the expected slowdown in headline inflation, as the core is expected to remain steady, while retail sales could inflict the most impact if consumer spending declines sharply Pricing around 1.0831 will be the next level of interest to the upside, with 1.0700 acting as the immediate level of support. 1.0520 will serve as more significant support.
However, these positive points are dwarfed by the return of FX intervention threat despite weaker US CPI and retail sales data. As for EUR/JPY, Stagnant GDP growth in Europe continues to present a challenging internal and external environment. The one positive note is that ZEW sentiment data has improved, but it’s just a small silver lining. The futures market now expects the possibility of ECB rate cuts as early as April next year despite ECB officials’ strong reluctance to even discuss the matter. EUR/JPY also appears to trade above 162.42, now potentially opening up the next resistance level at 170.00. The first level of support lies at the previous swing high of 159.75 with the most established support at 158.00. FX intervention talks have re-emerged after the yen’s weakness, but markets seem weary of constant lip service. The article has been authored by Richard Snow and can be found at DailyFX.com. Contact and follow Richard on Twitter: @RichardSnowFX
Potential Upside for EUR/USD and EUR/JPY in the Week Ahead
