The euro is finally moving and moving down, with EUR/USD making a big fall, after showing a lot of strength.
What is behind the fall? Here are 3 reasons and a look at the next levels ahead.
First, let’s see this fall on the chart:
- German weakness: The German locomotive giveth, the German locomotive taketh. After Germany reported strong growth in Q2 and enjoyed positive PMIs during Q3, the economic giant posted weak data: the number of unemployed rose by 7K, contrary to a drop of 5K that was expected: the first rise in 3 months. In addition, German inflation came out flat (m/m) while a rise of 0.2% was expected. Lower German inflation allowed for the recent ECB rate cut, and weaker inflation can allow lower rates for longer, and perhaps even lower.
- US data: GDP growth came out at +2.5% in the first revision, better than 2.2% expected and better than 1.7% originally reported. While inventory growth in Q2 creates worries for Q3, this adds to the notion that QE tapering will happen in September. A last confirmation is probably needed from the Non-Farm Payrolls: next Friday’s report for August could cement the beginning of the end of QE.
- Unwinding Syria: An air strike on Syria seems less imminent after the UK and France seem less eager to act. Perhaps it will not happen on Friday after markets close. The shadows of the Iraq war and the lack of popularity loom. How does this affect the euro? Indirectly: demand for safe haven Swiss francs falls, and with the EUR/CHF floor at 1.20, this also weakens the euro in a way. In addition, there is less demand for the safe haven Japanese yen. This boosts USD/JPY and the buying of dollars also weighs on EUR/USD. The crisis could escalate at any time, but at least for now, markets are somewhat calmer.
EUR/USD is trading at 1.3228 at the time of writing, after already trading as low as 1.3218. After failing to recapture the 1.34 line, the pair dropped and tried to recapture 1.3350. After this failure, the slide became an avalanche.
Support is found at 1.3180, which capped the pair in April, and this is followed by 1.31. Needless to say, the round number of 1.30 is critical support. On the upside, 1.3280 and 1.3350 work as resistance.
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