This week will be light on economic releases from the Eurozone, as shown on the schedule of key releases below: (click to enlarge).
I believe the Euro is showing some short-squeeze action, and will be more sensitive to positive news. However, any euro-rally should be categorized as a correction, especially against USD and JPY because these crosses are highly correlated with risk sentiment.
5:00AM EDT – inflation data for June is expected to be the same as May, with headline reading at 2.4% (year-over-year), and the core reading at 1.6%. Remember, lower inflation gives more room for the ECB to cut rates, while higher inflation might hamper rate cut outlook. At the moment the market is expecting further rate cuts this year, and the Euro been weighed down by these expectations.
5:00AM EDT – Eurozone ZEW Economic sentiment index is expected to read -18.3 for July, versus -20.1 for June. German economic sentiment is expected to read -14.5 after -16.9. These are still forecasts of bad readings, but slightly better.
If the readings are actually worse than June’s, we might see pressure on the euro.
4:00AM EDT – Current Account is expected to read a 5.3B surplus for May, after 4.6B for April. This is a lagging release, and not likely to have much impact. A deficit due to
2:00AM EDT – German PPI for June is expected to be -0.2% compared to -0.3% for May. Producer price can translate eventually to consumer prices, so these levels continue to confirm that the ECB has room to cut rates.
Eurozone Crisis Management:
All these economic data are second tier, and should not have any significant impact outside of initial reactions. The market might rather focus on the developments in the management of the current sovereign debt crisis. Here are some questions to consider
1) Will Spanish 10-year bond yields remain under 7% this week?
2) Can Italian yields come down below 6%?
3) Will Finland and other core eurozone countries drum up resistance against the debt financing solutions from the EUR summit?
4) Will Angela Merkel side with her constituents (German citizens), who are against new bailout terms?
5) Will there be further credit rating cuts by the major credit agencies
Yes for 1 and 2 are good. But if the euro is oversold, high yields are already priced in, and a short squeeze would not be surprising after the markets kicked off a squeeze to end Friday (7/13) trading.
Yes for 3, 4 and 5 are bad for the euro. Any complications that delays the enforcement of solutions produced by the EU summit a few weeks ago will pressure the euro. The thing is, the markets have been trading down the euro already and is probably going to be more sensitive to good news (if you believe the euro is oversold, which I think is a valid belief but just for the short-term).
China’s growth slowing story can hamper risk-on rally. The euro needs some risk-on trading to support any short-squeeze action this week. China has been taking steps to provide for a soft landing, reducing the benchmark interest rate twice in a month, and reducing taxes on foreign investment.
There aren’t many economic releases from China neither this week, so the focus will be heavily headlines driven. There could be a chance that all these steps from China will be welcoming for risk sentiment, which plays into the scenario that the euro will be in a short-squeeze in the short-term.
Fan Yang CMT is a forex trader, analyst, educator and Chief Technical Strategist for FXTimes – provider of Forex News, Analysis, Education, Videos, Charts, and other trading resources.
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