EURUSD, EUROZONE GROWTH, EUROPEAN ECONOMY– TALKING POINTS

EURUSD may agonize over pessimistic German ZEW survey data

Poor reading could induce risk aversion and send capital into USD

Eurozone growth remains lackluster – the ECB considering stimulus

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EURUSD may find itself in pain if German ZEW Survey data undershoots the already-low -22.0 forecast. As the proverbial steam engine of Europe, it appears the Eurozone’s economic champion is showing weakness that is rippling out into the regional economy. Germany’s growth is critical to the region’s financial stability, which is why key data out of Berlin warrants the attention of traders with exposure to European assets.

Eurozone inflation expectations are hovering at alarmingly low levels with the 5Y5Y Euro inflation forward swap only recently recovering from their all-time low in June. This comes as the ECB is considering introducing rate cuts and even QE – should the economic circumstances warrant it. Overnight index swaps are showing that markets believe there is an 85 percent probability of a cut by the September meeting.

For the Fed, market participants are pricing in a 100 percent probability of a cut at the upcoming FOMC rate decision at the end of July. EURUSD – rather counterintuitively – may actually fall if the Fed cuts rates. Investors will look at the decision to loosen credit conditions and may be hit by the sobering reality that prevailing economic conditions are poor enough to warrant a reversal of the Fed’s rate hike path.

Were this scenario to play out, the result would likely be risk aversion and capital outflow from risky assets – e.g. equities, commodity-linked FX – and into anti-risk assets like the US Dollar and Treasuries. Consequently, EURUSD would find itself under pressure and could aim to re-enter the 18-month resistance-turned-support channel. The fundamental outlook and technical readings suggest this is a possibility.

CHART OF THE DAY: GERMAN ZEW SURVEY EXPECTATIONS IN Q2 2019 IS AT LOWEST POINT SINCE Q1 2012

EURUSD TRADING RESOURCES

--- Written by Dimitri Zabelin, Jr Currency Analyst for DailyFX.com

To contact Dimitri, use the comments section below or @ZabelinDimitrion Twitter