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Euro Consolidates Following Weak German Production Data

David Becker
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EUR/USD dipped to fresh lows in the wake of the worse than expected German production data and with ECB’s Coeure remarking over the weekend that rates will stay low for a very long time, regardless of the developments in the rest of the world. The currency pair has since bounced back, and reflects a consolidative tone.

German May industrial production dropped -1.8% month over month, much more than expected and with April revised down to -0.3% month over month this was the third consecutive month of decline, which ties in with falling confidence numbers. The annual rate fell to just 1.2% year over year from the cycle peak of 4.9% year over year in January. The breakdown showed a sharp contraction in construction production, but manufacturing was also down -1.6% month over month.

More evidence then that overall economic growth slowed down in the second quarter from the strong first quarter, which was partly fuelled by special factors. Still, consumer confidence remains strong and the German recovery remains on track so far, even if the weak numbers highlight ongoing risk factors and confirm that the strong pace of economic growth in Q1 will not be sustained for the rest of the year.

The EURUSD will likely see support near the 6/26/2014 low at 1.3575, which provides the immediate target support level. EURUSD has been declining as the interest rate differential has widened in T-note v Bund yield, which has pressed to a new cycle wide toward 138 basis points, over 10 basis points up on levels seen in the early part of last week. The failed breach of the 200-day moving average last week and the subsequent brake of support at 1.3600-05, which encompassed the 20-day moving average, has reaffirmed strongly bearish technical credentials. Resistance comes in at 1.3610-11, Friday’s high and 20-day moving average, ahead of 1.3640-50.

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