EURUSD traded sharply lower over Tuesday this week as the latest growth data added weight to the view that the eurozone’s economic recovery is moderating. The flash GDP estimate for the first quarter came in at 0.4% quarter on quarter and just 2.5% year on year, marking a sharp decline from the prior reading of 2.8% year on year in the last quarter of 2017, and coming in well below market expectations.
One Off Effects Notable
While the data is disheartening as the EUR dives on weak Q1 GDP estimate, it is worth noting that there have been several isolated factors that have weighed on the overall data. The weather in March was unusually cold this year which ha a negative impact on construction activity. Alongside this cold snap, the European Centre for Disease Prevention and Control noted that the influenza season this year had been longer than usual which had a dampening effect on activity and consumption. Also adding downward pressure to the data were the strikes that took place in Germany along with the earlier Easter holiday which fell in many countries across the Eurozone, again having a dampening effect on activity. In terms of the global picture, higher oil prices have transpired to be far more persistent than most were forecasting which is also likely to have had a bearish effect on consumption.
The market’s reaction to the data has been swift long covering, which is a theme that has been apparent over EUR positioning in recent weeks as the market digests the latest ECB outlook. Speaking at the ECB’s latest meeting, Draghi noted that there had been a downturn in economic data though added that the bank believed this to be due largely to temporary factors and likely to pass heading into the rest of the year.
However, EUR sellers emerged in strength as Draghi said that the bank remained willing to extend its asset purchase program beyond the current September completion point if necessary with rates due to stay low well past the completion of QE. This was a disappointing clarification for bulls given the ECB chief’s comments at a recent meeting that the ECB had removed its easing bias which has been in place since the Global Financial Crisis.
Given Draghi’s comments about the downturn in data, the weaker than expected GDP print added fuel to the bearish move in EURUSD which looks set to continue until the data flow starts to improve. Industrial production remained weak in March, recovering by just 0.5% after a 0.9% decline in February meaning there will be little carry over effect into the second quarter.
As we have seen across several developed economies, Q1 has gotten off to a tricky start and the ECB is now caught between managing market expectations and delivering effective policy. Incoming data will now take on an even deeper importance as traders look to gauge when the bank is likely to press ahead with policy normalisation or indeed, if the bank is likely to extend asset purchases beyond September.
After breaking down through support at the 1.2088 late 2017 high, the EUR dives on weak Q1 GDP estimate as it fuelled further selling. A deeper move now looks likely though the area around 1.1616 – 1.1580 could see some buying kick in as we have strong technical confluence between the November 2017 low, 2016 high and the rising long term trend line from 2016 lows. If we do get a bounce here we could be setting up a larger head and shoulders pattern as shown by the orange lines which would suggest the likelihood of a larger bearish reversal in EURUSD in the medium term.