This week our currency strategists focused on the Eurozone CPI update and the US Manufacturing PMI update in search of potential high-quality setups.
Of the four scenario/price forecast discussions this week, One discussion arguably saw both financial and technical arguments raised To become a potential candidate for overlay trading and risk management. Check out our review of those discussions to find out what happened!
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EUR/GBP 1 Hour Forex Chart by TradingView
On Monday, our Forex strategists set their sights on the upcoming release of the Eurozone CPI and its potential impact on the Euro. Based on our Event Guide for Eurozone Flash CPI reports, markets were expecting headline inflation to come in at 1.9% y/y (vs. 2.2% previously) and core inflation at 2.7% y/y (unchanged from previously).
With these expectations in mind, here’s what we were thinking:
“Euro boom” scenario:
If the CPI comes in higher than expected, we thought this could ease pressure on the ECB to cut interest rates in October. We thought this might attract fundamental EUR buyers, and we had our eyes on the EUR/CAD for potential long strategies, especially in light of the pair’s recent bullish momentum and recent dovish signals from the Bank of Canada.
“Euro decline” scenario:
If Eurozone inflation is weaker than expected, we expected this to increase expectations of a rate cut from the ECB in October. We were looking at potential selling strategies for EUR/GBP, as the pair was testing resistance at the top of the recent range, and the Bank of England maintained a more hawkish stance due to relatively difficult inflation conditions in the UK.
What actually happened
Well guys, Tuesday has passed, and the Eurozone CPI decided to give us a mixed set of results. Preliminary estimates from Eurostat showed that the euro zone’s annual inflation rate fell to 1.8% in September, down from 2.2% in August and just below the 1.9% expected. The core inflation rate stabilized at 2.7% on an annual basis, in line with expectations.
Key points from the CPI report:
- Energy prices continued to be the main driver of the inflation slowdown, declining by 3.3% year-on-year
- Food, alcohol and tobacco inflation fell to 5.4% from 6.4% in August
- Services inflation slowed to 4.1% from 4.4%
- Non-energy industrial goods inflation remained stable at 4.1%
Market reaction
The initial market reaction to the CPI release weakened the Euro across the board. While core measures in the quick CPI update showed relatively high inflation rates, the headline figure below 2% combined with weak Eurozone PMIs is likely the main bearish driver for the day.
Looking at the EUR/GBP chart, we can see that the pair initially saw a small decline but found buyers just above the S1 pivot support area. Broad-based risk-off sentiment this week likely played a role in pressuring risk assets, such as the British pound, sparking choppy behavior in the EUR/GBP pair into Thursday’s session.
On Thursday, Bank of England Governor Bailey surprised markets with a downbeat shift in sentiment about future interest rates, saying the central bank could ease aggressively if inflation remains low. This pushed the British pound over the edge into one of its worst days of the year, and EUR/GBP rose on a 3-day ATR.
Judgment
So, how do we do? In our original discussion, we mentioned potential short setups for EUR/GBP if Eurozone CPI comes in weaker than expected, which it has. But the risk-off environment favored low-yielding assets like the euro versus riskier assets, limiting any downside moves this week.
In addition, surprise comments from Bank of England Governor Bailey sent the pound lower this week, making it unlikely that the EUR/GBP pair will recover, except for those who took short positions at the pivotal resistance area R2.
So in general, We rate this discussion as “unlikely” supportive of a potentially positive outcome because while a weak headline CPI update in the eurozone initially pressured EUR/GBP, external factors such as the risk environment and bank comments The central bank pushed the price much higher than the discussion. Levels and trigger levels are likely to hit most invalidation arguments if good trade management practices are used.