EUR/USD, EUR/GBP analysis: European open – 31/08/2023

• China’s official PMIs were mixed with manufacturing contracting at a slower pace whilst services expanded at a slower pace. Whilst this saw the composite tick higher to 51.3 (above 50 is expansion), it’s certainly nothing to get excited about.
• Business investment in Australia (capex) saw its best quarter since 2015 at 2.8% (2.4% in Q1) as tax cuts enticed spending on equipment. Firms also increased spending plans for fiscal year 2024, which rose 14.5% q/q
• As AUD/USD was already enjoying a strong start to the session, the data coincided with the high of the day before mixed PMIs from China saw the Aussie hand back earlier gains
• Gold is trying to notch up its fourth consecutive day higher, although it should be noted that Wednesday’s bullish candle was less than half the size of Tuesday’s (and half of that its range was upper wick), which shows a loss of bullish momentum over the near term
• WTI crude oil is trading in a narrow range just beneath Wednesday’s high, but like many other markets now sits in the hands of today’s UC PCE inflation report and the performance of US yields and the dollar
• DAX formed a 2-bar bearish reversal pattern yesterday (dark cloud cover) to warn of a potential pullback. But as mentioned in yesterday’s report, low volatility pullbacks that hold above 15,600 could be favourable to bulls
• Stock market index futures are modestly higher ahead of today’s US inflation report

Events in focus (GMT+1):

• 07:45 – France CPI (revised)
• 08:15 - BOE member Pill speaks: “Back to target? Monetary policy in advanced economies”
• 08:55 – Germany unemployment
• 10:00 - Eurozone CPI (revised)
• 13:30 – US PCE inflation, jobless claims

With Fed Fund futures betting with ~90% conviction that the Fed will hold interest rates steady in September, and renewed optimism that they have reached their terminal rate, markets may want to see softer PCE inflation and rising jobless claims to feel safe that their bearish reaction to weak job openings was correct. Yet estimates suggest the PCE index could rise to 3.3% y/y (3.0% previously) and core PCE rise to 4.2% y/y (4.1% previously). Whilst both PCE and core PCE are expected to hold steady at 0.2% m/m, what if they rise? It could certainly put a fly in bearish ointment and makes the bearish bets on the US dollar this week question their positioning. Therefore, we’ll keep a close eye on the direction of the monthly reads as they may provide the better cue for which way the US dollar trades, heading into Friday’s Nonfarm payroll report (NFP).

Whilst trading ranges were relatively quiet during the Asian session outside of AUD/USD, 1-day implied volatility levels are 169% or higher relative to their 20-day averages for EUR/USD, GBP/USD, USD/CHF and USD/CAD.

EUR/USD technical analysis (1-hour chart):

EUR/USD has risen for three days – and the past 2 days has been the most bullish 2-day range in six weeks. And with so much excitement from weak US data, the contrarian in me wonders whether markets have once again gotten ahead of themselves and we’re due some mean reversion.

A pullback towards the daily pivot point / July open or even 1.0900 seems feasible ahead of US inflation data. And it may be a tempting level for dips buyers to re-enter in anticipation of softer US CPI figures. But by the same token, a break beneath this pivotal level could look equally tempted to bears.

EUR/GBP technical analysis (daily chart):

EUR/GBP has produced some decent swings over the past couple of months, even if it has essentially traded sideways. But to hammer home the point it really has gone sideways, I noted that the open to close range of the past three months has been just 30 pips.

The daily chart shows that a false break of the June and July low prompted a 1.4% rally in just four days (from the freshly printed YTD low). A 20-bar bearish reversal pattern called a dark cloud cover formed, and prices are now testing Wednesday’s low. Given the 2-bar reversal pattern formed around a high-volume node (HVN) from a prior decline, the bias is for another dip lower. As it is the end of the month, traders should be prepared for some fickle price action. But from a purely technical perspective, a move down to the December low / 0.8560 seems achievable.

-- Written by Matt Simpson

Follow Matt on Twitter @cLeverEdge