Article by ForexTime
While news headlines continue to be dominated by the protests occurring in Hong Kong, the EU economic sentiment further worsened on Tuesday. Eurozone inflation declined again in September, with prices increasing at their slowest rate in nearly five years. Compared to September 2013, CPI rose by just 0.3% and slowed from August’s 0.4% increase.
When the Eurodollar declined from those dizzy May high’s (1.3990) there was some optimism that this would lead to improved economic data. So far, we are yet to see this correlation with fears of stagnant economic growth resurfacing following soft PMIs and now poor CPI data. The EURUSD declined by over 100 pips on Tuesday as investors continued to price in further action from the European Central Bank (ECB). There will be pressure on Draghi to act again this Thursday and although i can’t see the ECB acting on two consecutive occasions, i can envisage Draghi teasing more stimulus in the coming months, in the hope of driving the Eurodollar down some more.
With the US economy improving and the Federal Reserve concluding QE later in October, investor attraction to the Greenback is strong at present. A collaboration of USD strength and a weak EU economic sentiment driving the euro lower means that the bear run in the EURUSD is not over quite yet.
Meanwhile, the UK’s fundamentals continued to impress with another robust performance from the UK economy. Quarterly GDP was revised upwards to 0.9%, which enticed the GBPUSD to progress to 1.6286. However the Cable’s gains failed to last with the pair concluding trading at 1.6212. A combination of a lack of progress in Westminster where politicians are still trying to define what extra political powers Scotland will receive and confirmation of the UK’s first airstrike in the battle against the Islamic State encouraged Cable softness.
Still, the divergence between the EU and UK economy remains strong with the pair recording it’s 11th consecutive day of losses on Tuesday. The pair declined to its lowest level since July 2012 (0.7765) and looks set to meet the July 2012 low, 0.7555 in the coming days.
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The Aussie is another pair that has moved with volatility in the past 24 hours, as the pair progressed to 0.8766 in the early hours of Tuesday morning. There were no major economic indicators released from Australia around that time, so the pairs 70 pip advancement was perhaps encouraged by Asian investors developing some risk appetite as they watched the events in Hong Kong unfold.
However, the pair has already declined to its lowest level since January this morning (0.8662) following a disappointing retail sales performance this morning. The market forecast for retail sales in August was a monthly 0.4% rise, but retail sales only increased by 0.1%. The Australian economy remains under pressure to diversify away from mining reliance and move towards domestic consumption and disappointing retail sales this morning has nerved investors. We await more domestic related economic indicators from Australia on Thursday morning, such as Trade Balance and Building Approvals. If this data also disappoints, there is potential to extend below the current 2014 low (0.8659).
Written by Jameel Ahmad, Chief Market Analyst at FXTM.
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