EUR/USD – Euro Rally Stalls on Soft German Inflation Report

EUR/USD has posted losses on Friday, as the pair trades at 112.70 in the European session. On the release front, German producer prices pointed downwards, coming in at -0.5%, below estimates. In the US, today’s highlight is UoM Consumer Sentiment, with the markets anticipating the indicator to improve to 92.1 points. As well, three FOMC members will deliver remarks during the day, and the markets will be looking for some feedback from the policymakers with regard to Wednesday’s FOMC policy statement.

Soft inflation numbers continue to raise concerns about the health of the Eurozone economy. On Friday, German PPI, which measures inflation in the manufacturing sector, came in at  -0.5%, below the forecast of -0.2%. It marked the seventh straight decline for the indicator. Consumer inflation data has also been dismal, as Eurozone Final CPI came in at -0.2% earlier in the week. These numbers underscore a sluggish Eurozone economy, and the markets are far  from convinced that recent easing moves by the ECB, which includes lowering interest rates and expanding the bond-purchase program, will right the leaking ship.

If there is one thing that markets are allergic to, it is uncertainty, so conflicting statements from senior ECB policy officials run the risk of creating a market backlash. Last week, the euro went on a roller-coaster ride, initially sliding after the ECB announced significant easing measures, only to reverse and climb sharply after ECB head Mario Draghi stated in a press conference that the central bank had no plans to further lower rates. However, ECB chief economist Peter Praet appears to have contradicted his boss in a newspaper interview published on Friday, stating that rates have not reached their lowest limits. Praet was very clear that the ECB could make further cuts to rates, stating “if negative shocks should worsen the outlook or if financing conditions should not adjust in the direction and to the extent that is necessary to boost the economy and inflation, a rate reduction remains in our armoury”. Will the markets react to Praet’s comments? The euro remains steady, but conflicting statements out of senior ECB headquarters will likely raise eyebrows about the ECB’s future monetary policy plans.

As widely expected, the Federal Reserve stood pat and did not raise interest rates at its policy meeting on Wednesday, maintaining the benchmark rate at 0.25%. The Fed statement noted that the US economy remains vulnerable to an uncertain global economy, but the Fed expects to raise rates later in the year due to moderate growth and “strong job gains”. The statement was dovish in tone, a clear departure from the December meeting, when the Fed raised rates for the first time in nine years and talked about four rate hikes over the course of 2016. However, the Fed has now downgraded its rate hike forecast to just two hikes during the year. In a short span of three months, global demand has weakened, precipitated by the Chinese slowdown, and US numbers have cooled in comparison to the economy’s torrid pace in the second half of 2015. If US inflation and employment numbers push higher in next several months, a rate hike in mid-2016 seems a good bet.

EUR/USD Fundamentals

Friday (March 18)

• 7:00 German PPI. Estimate -0.2%. Actual -0.5%
• 13:00 US FOMC Member William Dudley Speaks
• 14:00 US Preliminary UoM Consumer Sentiment. Estimate 92.1
• 14:00 US Preliminary UoM Inflation Expectations
• 15:00 US FOMC Member Eric Rosengren Speaks
• 18:00 US FOMC Member James Bullard Speaks

Upcoming Key Events

Monday (March 21)

• 14:00 US Existing Home Sales

*Key events are in bold

*All release times are GMT

EUR/USD for Friday, March 18, 2016

EUR/USD March 18 at 9:20 GMT

Open: 1.1315 Low: 1.1254 High: 1.1337 Close: 1.1267

EUR/USD Technical

• EUR/USD was flat in the Asian session and has posted losses in European trade
• 1.1278 remains busy and has switched to resistance following losses by EUR/USD on Friday. It is a weak line
• 1.1172 is providing support

Further levels in both directions:

• Below: 1.1172, 1.1087, 1.0941 and 1.0847
• Above: 1.1278, 1.1387, 1.1495, and 1.1638
• Current range: 1.1172 to 1.1278

OANDA’s Open Positions Ratio

EUR/USD ratio continues to show movement towards short positions, which have a strong majority (65%). This is indicative of strong trader bias towards EUR/USD heading to lower levels.

This article is for general information purposes only. It is not investment advice or a solution to buy or sell securities. Opinions are the authors; not necessarily that of OANDA Corporation or any of its affiliates, subsidiaries, officers or directors. Leveraged trading is high risk and not suitable for all. You could lose all of your deposited funds.