EURUSD – Time to Challenge the Yearly Low?

It might now be old news that the EURUSD suffered on Tuesday following a horrendous German ZEW Survey result, but we can still expect further EURUSD volatility as the week begins to draw to a conclusion.

On Thursday morning alone, there is a wide range of economic data released including French GDP, German GDP, EU CPI (inflation) and EU GDP. It remains no hidden secret that the EU is currently suffering low inflation levels, which has prompted the European Central Bank (ECB) to act on two occasions within the past nine-months to try and boost the economy.

However even if Thursday’s EU CPI data reaffirms how serious low inflation levels remain to the European Union, patience might be needed from investors if the CPI release disappoints. Investors are aware that stimulus measures introduced in June will require some time to take effect before accessing its success and I am of the opinion that the EU GDP result should be considered as the highest risk to the EURUSD valuation.

When looking back at Mario Draghi’s press conference last Thursday, there are two quotes that stick in my memory. Firstly, Draghi stated that “the EU recovery remains weak, fragile and uneven,” and that the “the fundamentals for a weaker exchange rate being better now than a few months ago”. The calm manner in which Draghi expressed this suggests to me that the ECB President prefers a more natural decline to the EURUSD valuation, rather than a sudden drop as this would result in a dovish threat and investors pricing in central bank action.

Bearing this in mind, traders and investors should be paying attention to the EU GDP data and particularly, Germany. Reason being is that aside from Germany contributing towards around 30% of the EU economy, Germany is widely seen as the “backbone” of the EU. Furthermore, nobody could have really envisaged that German economic performances would weaken as a result of the conflict in Eastern Europe and this is surprising investors. As a result deteriorating German performances are weakening the EURUSD in its own right.

If Draghi is looking for a more natural EURUSD decline, a weakening German economy will go a long way towards achieving this goal. Speculation has already emerged that the German GDP will be confirmed as having contracted by 0.1% in Q2 on Thursday morning and confirmation of this should hit the EURUSD hard.

In fact, I would expect the current yearly low (1.3332) to be challenged and if the overall EU GDP release is looked upon in a worrying manner, we may even experience a downside break towards the 7^th November 2013 low, 1.3295.