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Euro under pressure as German CPI stabilizes

H.S. Borji
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Euro under pressure as German CPI stabilizes

The euro tumbled against its US counterpart Thursday, as disappointing Eurozone sentiment data and weak German consumer inflation placed more pressure on the European Central Bank to act decisively to stimulate growth.

The euro-to-dollar exchange rate fell to a session low of 1.3170. The pair subsequently consolidated at 1.3178, declining 0.13 percent. The EURUSD is approaching its lowest level in a year, as investors continued to find justification for unloading the euro. The pair’s next critical level is 1.3118, the low from September 6, 2013. The technical charts show initial support at 1.3160 and resistance at 1.3218.

The pair has tumbled 3.3 percent over the last two months, and is now trading well below its long-run averages. The 100-day simple moving average for EURUSD is 1.3598 and the 200-day average is 1.3648.

The common currency declined against the British pound, as the EURGBP tumbled 0.15 percent to 0.7949. The pair is likely to find support at 0.7943 and resistance at 0.7970.

The euro-to-yen exchange rate declined 0.24 percent to 136.70. Initial support is likely found at 136.47 and resistance at 137.33.

The latest euro sell-off was triggered by European Central Bank President Mario Draghi, who said last week the central bank was prepared to deploy any means necessary to fight deflation in the Eurozone.

Speaking at the annual Jackson Hole Symposium in Wyoming, Draghi said inflation has been on a “downward path” since the summer of 2012.

“Acknowledging this, the Governing Council would use also unconventional instruments to safeguard the firm anchoring of inflation expectations over the medium- to long-term,” Draghi said.

In economic data, German consumer inflation stabilized at low levels this month, a sign the ECB would have to mobilize those “unconventional instruments” to boost consumption.

Inflation in Europe’s largest economy was flat in August, the Federal Statistics Office reported today. Compared to August 2013, consumer prices rose 0.8 percent, as expected by the consensus.

The reading was due mostly to declining energy prices, which were offset by slight increases in the cost of food and services.

The European Commission will release Eurozone inflation figures on Friday. Economists forecast annual inflation in the 18-nation currency bloc to weaken this month. Annual inflation has been in the “danger zone” of below 1 percent since last year.

Separately, Eurozone economic sentiment in August fell to an eight-month low, driven largely by deteriorating conditions in the Ukraine. The economic sentiment indicator fell to 100.6 from 102.1.

Sentiment also declined in the industrial and services sectors, official data showed.

The currency region’s nascent recovery stalled unexpectedly in the second quarter, as the Ukraine crisis began to weigh on the 18-nation economy. Germany contracted for the first time since 2013, while France stagnated and Italy slipped back into recession.

The ECB has made no changes to monetary policy in the last two months, but is reportedly considering more drastic measures like quantitative easing. The Bank slashed interest rates to 0.15 percent in June and introduced a negative deposit rate in order to encourage banks to lend their excess cash.

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