Euro finds some stability

The EUR/USD has been a bit more hesitant to go lower than in recent days, in part because of the US dollar reaching technical ‘overbought’ levels and the fact we have seen some surprisingly strong Eurozone industrial production (+0.5% m/m) and GDP (0.3% Q/Q) data. But with the more forward-looking indicators pointing at a slowdown, especially in Germany, the EUR/USD may be hesitant to go higher. Indeed, a leading survey of about 300 German institutional investors and analysts (i.e., ZEW) released on Tuesday revealed that current conditions have deteriorated further, even if they are less pessimistic about the future. The German August ZEW survey current conditions printed -71.3, its lowest level since October.

So, if we do see a rally in this pair, it will most likely be because of US dollar losing its appeal – say, as a result of profit taking or peak rates being fully priced in – than the euro finding love. But in the short-term, the EUR/USD direction will be primarily driven by events taking place in China. Despite today’s bounce, the path of least resistance remains to the downside until the charts tell us otherwise.

The US dollar found only mild support from the FOMC minutes that were released late in the day on Wednesday, which signalled FOMC’s opening to more tightening. Needless to say, market pricing did not move much with the probability of another Fed rate hike remaining around 13% in September (35% in November.)

Attention remains on macro data, with jobless claims coming in roughly in line with estimates at 239K after last week’s surprise jump by 250K. The Philly Fed manufacturing index came in better at 12.0 vs. -9.8 eyed, improving sharply from -13.5 previously. After a stronger industrial production data on Tuesday, investors remain hopeful that a hard landing will be avoided in the US. For this reason, traders are struggling to find good reason to sell the dollar, apart from the fact it is starting to look a little bit overbought.

In recent weeks the greenback has been finding support from several sources – weakness in China, rising real US bond yields and weakness in Eurozone data. The release of stronger US retail sales data and industrial production data this week only helped to reinforce the view the US economy is holding its own relatively well in what should, in theory, be a challenging environment for the consumer faced with high inflation and interest rates. Fears over a hard landing have diminished, and now many analysts only expect to see the US economy experience a soft economic landing. Expectations that interest rates may have to remain high in the US for longer is what is helping to keep bond yields and the dollar elevated.