Inflation in the Eurozone rose by only 0.2% mom and 0.8% yoy in August; disappointing analysts who had expected a 0.3% rise and 0.9% rise respectively.
Unemployment also remained unchanged in August defying the consensus of economists who had forecast it falling another basis point to 10.0%.
The results could make it marginally more likely that the ECB will opt to increase its already substantial package of stimulus measures at its September meeting.
When central banks raise stimulus it is generally seen as negative for the currency due to the increase in supply of money, as well the temporary downwards pressure put on rates.
The EUR/GBP exchange rate remained just below 1.1800 after the release, whilst the EUR/USD rate actually - counter-intuitively - rose five-hundredths of a cent following publication of the data.
Foreign Exchange advisors Foenix Partners’ senior sales trader, Alex Lydall, said the figures showed growth in the bloc was “stagnant.”
Although it was, “a little early to call for further action,” he argues Mario Draghi would be “taking a deep breath” to calm his nerves after the release and the worse than expected result would put the ECB’s policy outlook back on centre-stage after the recent hyper focus on the Fed.
German Unemployment Remains Unchanged
Also out from the euro-area was unemployment data from Germany in August, which came out at 6.1% in August, from 6.1% in July and the same expected.
The data shows no signs yet of damage from Brexit due to falling orders to the UK which is a key destination for German manufactured goods.
It indicates less of a short-term impact on Germany from Brexit than had been expected, and lowers the probability of the ECB pulling the trigger in September – a positive for the euro.
However, the single currency failed to react following the data as traders kept their ammunition for the more important inflation data released on shortly after.
Outlook Posiitve Versus Commodity Currencies
The euro should remain supported in the short-term, particularly versus commodity currencies such as the Aussie and Canadian dollar.
We believe that this in turn raises the prospect of further advances in the EUR/GBP as the broader Euro complex finds increased suppport.
One prominent analyst says that the support for Euro could well stem from a broader shift in global risk sentiment.
Westpac’s FX strategist Richard Franulovich says the possibility that global risk appetite will fall in coming days and weeks has increased after the Global Economic Surprise Index has shown recent signs of topping out:
The index measures the aggregate difference between actual economic data results and expectations – if the actual result is higher, the index rises – if lower it falls.
When lots of data comes out above expectations the index rises more rapidly.
The index appears to move in cycles, and the current topping pattern at the average cycle highs suggests global data will start to disappoint to the downside - that is that it will come out below expectations.
This indicates a fall in risk appetite, which is positive for the euro as the currency acts as a safe-haven.
It does so because many investments made in the less stable emerging markets are funded by euros due to the Eurozone’s cheap borrowing costs, and when risk aversion rises investors sell those investments and repatriate their euros, temporarily increasing demand for the currency.
By the same token this is negative for risk sensitive currencies such as the Aussie dollar and Canadian dollar, which tend to weaken on falling risk appetite.
Global risk appetite and link to US data
Indeed it appears that regardless of US data the outlook for risk appetite seems 'doomed'.
If the data improves then the Fed will be expected to increase rates earlier, however, this will have the effetc of dampening the outlook for risk appetite as it will increase emerging market borrowing costs, since much of their data originates in the US.
If on the other hand US data worsens, then risk appetite could also falter due to the US's importance to the global economy.
It's a possible lose-lose for risk - and win-win for the euro.
Euro versus commodity pairs
The fundamental analysis of risk trends appears to be broadly borne out by a technical analysis of the charts of Euro-AUD and CAD pairs.
EUR/AUD below, for example, shows a bullish flag pattern forming after a strong move higher.
The posting of a bullish dragonfly doji pattern within the flag, is a further sign of upside potential for the euro.
The MACD indicator in the lower pane above zero is another bullish sign.
The position of the 50 -day moving average below the flag,is acting like a cradle supporting it; this is a further bullish sign as prices tend to move in the direction of least resistance and the 50-day is a barrier, so they are more likely to avoid it and go higher than lower.
Overall the chart suggests a leg higher, with a break out of the flag, signalled by a move above 1.4900 confirming an extension up to the 200-day MA at 1.5070, where the exchange rate would be expected to pause or rotate at resistance.
Moving on to EUR/CAD, and we see it showing a slightly less bullish but still biased to the upside chart configuration.
The chart below shows how the pair has been backing and filling over recent weeks after making highs at the 200-day moving average, at the start of August.
This steadily declining, sideways consolidation is more a pause than a concerted down-trend and the pair is likely to move higher in another leg eventually.
A break above the 1.4700 level would provide the necessary confirmation, with an upside target at 1.4760.
The Euro Index in fact is also showing signs it could be about to reverse and move higher, after falling to the lower border line of a rising channel.
This is a level where the index is likely to stop declining and reverse before moving higher.
The index is further supported by a nexus of support provided by the 200-day moving average and the 50-day just below the lower channel line.
A rise back inside in the channel higher is the most likely scenario from the current positon, with a move above the 89.20/25 level confirming a move up to the highs at 89.70.
Euro versus the pound
Against the pound the bullish potential of the euro is not as compelling, nevertheless, according to the logic of a complex form of cycle analysis called Elliot Wave theory, the current mini-triangle completing on the four-hour chart is testament to a start of a final leg higher for EUR/GBP.
This is because the pair is probably in an Elliot Wave up from the May lows. Elliot Waves are composed of five smaller waves and this one is currently in its final stages, in a wave four '(4)' correction of the final fifth '5' wave up.
Within the wave four it has formed a triangle which always terminate corrections.
This means the correction is probably ending and the pair is about to move higher, in the fifth '(5)'wave of the fifth '5'.
A breakout above 0.8560 would probably confirm a move up to the next target at 0.8600.
A predicted fall in risk appetite is not the only reason to expect the Euro to rise. There is also the fact that the ECB is less likely to increase stimulus at its September meeting compared to previous expectations.
According to analysts at Morgan Stanley recent data from the Eurozone has been much more positive than previously expected, leading to a recalibration of ECB easing expectations.
The now much reduced chances that Brexit will cause a fatal wound – at least in the short-term - mean the ECB will probably back off from further easing.
This should support the euro as stimulus tends to weaken currencies by increasing supply and therefore diluting individual unit value.
“We remain bullish on EUR and stick to our quarter-end target of 1.16 for EURUSD. The Eurozone economy has held up well post-Brexit, supported by the recent release of Eurozone August flash PMIs. This increases the risks of the ECB not having to ease significantly beyond what markets have priced. Even if the ECB extends its QE programme or cuts rates further, we think it will not be able to push down long-term bond yields substantially to weaken the currency, as Eurozone bond yields are already low or negative" Said Morgan Stanley in a recent note, adding:
"Data weakness in the US has also caused the spread between the Eurozone and US economic surprise indices to widen significantly since July, reaching levels last seen in May when EURUSD traded at 1.15.”