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Euro Reverses Gains Following Weak Zew and IP

David Becker
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Euro Reverses Gains Following Weak Zew and IP

The dollar gained traction reversing the recent upswing in the Euro as weaker than expected EU Industrial production and soft German Zew data eroded the value of the European currency. The technical picture had showed that momentum was moving in the Euro’s direction, as yield differentials began to favor the Euro on the heels of a weakening U.S. equity market.

Eurozone industrial production dropped 1.8% month over month in August, while July numbers were revised lower to 0.9% month over month from 1.0% month over month reported initially. The timing of holidays, which already affected German production data, were a major reason for the recent August swings. The less volatile three months comparison shows that production was down 0.6% in the three months to August, after falling 0.3% in the three months to July. Market participants are accustom to seeing the ECB reacting to weak data which will keep pressure on Draghi to widen the ECB’s asset purchase program.

The German ZEW investor confidence fell back to -3.6 from 6.9 in September. This was even weaker than consensus forecasts and shows that pessimists outnumber optimists. The ZEW reading already dropped to 14.2 in Q3 from 35.4 in Q2 and the October number suggests that the fourth quarter reading will come in negative and will add to the fears that the German economy is heading for a new recession as the impact from the Russia sanctions are starting to weigh. The sector breakdown confirms that only the assessment of domestically oriented sectors such as retail and consumer goods as well as construction remains optimistic.

After testing the top end of the daily range at 1.2750, the EURUSD currency pair is trading near session lows at the 10-day moving average at 1.2675. The MACD is printing in positive territory after generating a buy signal last week, while the RSI is printing near 40, which is in the middle of the neutral range and reflects consolidation.

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