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Euro Reverses Wednesday’s Gains as Flight to Quality Accelerates

David Becker
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www.iforex.com
Euro Reverses Wednesday’s Gains as Flight to Quality Accelerates

The EURUSD reversed Wednesday’s gains as investors moved capital to safe haven assets as a flight to quality has now started in earnest. This comes despite a worse than expected retail sales report on Wednesday, which showed that month over month sales volume in the US, declined. The Eurozone trade surplus widened, amid a decline in imports, while September consumer inflation remained unchanged.

The Eurozone trade surplus widened to 15.8 billion from 12.7 billion in the previous month, amid a sharp decline in nominal imports, which dropped 3.1% month over month, more than counterbalancing the -0.9% month over month decline in exports. Still, the positive headline number aside, underlying trends are worrying as this was the third consecutive month with a drop in exports. With German trade being hit by the sanctions with Russia the outlook for overall Eurozone trade is also looking shaky.

Eurozone September CPI inflation was confirmed at 0.3% year over year, unchanged from the preliminary reading and with prices up 0.4% month over month. Core inflation was revised up to 0.8% year over year, still down from 0.9% year over year in the previous month. The continued inflation undershoot and the fact that even core inflation is considerably below the ECBs 2% limit for price stability remains a concern as officials worry that it will eventually unhinge inflation expectations, which could ultimately lead to a deflationary spiral. The headline numbers are soft due to the necessary rebalancing process within the Eurozone, but the weak numbers will keep pressure on the ECB to do even more and Draghi seems more than willing to test the limits of the central bank’s mandate.

The currency pair was able to hold support near the 10-day moving average at 1.2678, with resistance seen near 1.2870. Momentum is positive with the MACD (moving average convergence divergence) index printing in positive territory with an upward sloping trajectory.

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