Euro static despite deflation concerns

Positive news from Ireland and Germany has gone some way to balancing out concerns following numbers released by Eurostat.

Inflation numbers from Eurostat have failed to meet expectations. Despite denials from Mario Draghi that disinflation was a concern, the fact that the more important core consumer price index remains under 1% – well below the European Central Bank target of 2% on-the-year – means energy price pressures are unlikely to be a reason for the slide. This may well invite some degree of monetary easing at Thursday’s press conference, or at the very least an indication that it is in the offing.

In Germany, however, better-than-expected retail sales, coming in at 1.5% on the month versus the 0.5% increase expected, provided welcome good news this morning. This data point has been something of a disappointment for the last few months so the improvement (albeit during a generally strong month for retail sales), along with a drop in unemployment, has helped to underpin the euro against the dollar.

Ireland’s return to the bond markets has also aided sentiment in the eurozone, as its latest auction was well oversubscribed and saw 10-year yields on Irish debt fall to their lowest level since 2009. However, while this may well indicate that investor confidence is returning it does little to change the national debt overhang which, at 124% of GDP, is amongst the highest in the EU.

The four-hour moving average at 1.3655 has acted as a barrier to upside over the past few days, with support found at 1.3570 which is the rising trend-line from the July lows of 1.2750. This should ensure that the euro will remain range-bound for the time being until one of these metrics is breached. Any breach of support could send the single currency back towards the 100-daily moving average at 1.3540, and below that 1.3470/80.

There has been a momentary weakening of the dollar, as known dove Janet Yellen was officially named head of the Federal Open Market Committee. Trade balance figures for last month are due out from the US later this afternoon (London time). The data is expected to be fairly stable at $40.4 billion, with the import side of the bill helped by the pullback in energy prices.

Spot FX EUR/USD chart

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