KTM FX Weekly: Confidence shifting down the gear, so do the Euro

Last week’s highlight was that consumer sentiment for the EA and US plunges amid delta variants. The market reaction was Euro plunged on Germany’s Economic confidence data, and USD does the same after US consumer confidence plunged last Friday. On top of these, slowing down the Chinese economy is also added further uncertainty.

 Confidence shifting down the gear, so do the Euro: 

 Past week’s confidence data suggest the growth momentum is weakening on both sides of the Atlantic Ocean. It was started with EA and ended with the US. 

• Sentix:The global economy is running at full speed, but momentum is weakening. In the Eurozone, the recovery of the current economic situation continues. At 30.8 points, the assessment reached its highest level since October 2018. The overall index for the Eurozone drops by 7.6 points. Germany’s economy continues to be in boom-like shape. It rises for the 15th time in a row to 38.5 points. As per the latest Sentix report, we learned that the expectations component halves.

 ZEW: Germany’s ZEW survey decreased in August, falling 22.9 points to 40.4. Since May, this is the 3rd time the reading has dropped. But in July, the reading was dropped significantly.

Euro dragged down post the data and fell to March low’s and Germany 10year bond yields printed a low of -0.49.

Besides, consumer sentiment deteriorated in the US, with the sentiment index fell by 13.5% from the July high. The bond market reacted wildly; as a result, 10year yields fell 5bps to 1.29%.

Coming to the Chinese data, economic data was weaker than expected. Retail sales and industrial production both came weaker than analysts estimated.

Based on the above three weaker sentiment readings, we expect Euro will continue to witness selling pressure in the coming days. The risk barometer AUDJPY and the Euro against the yen suggesting uncertainty continues to hover on the surface.

Especially the cross, EURJPY is on the verge of a major breakdown. A decisive close below 128.00 would open for 126.50-126 levels. Please see the chart below.

FX positioning:

Coming to the EURUSD, the pair traced out a near-term bottom at 1.17 with a positive RSI divergence on cards. However, the IMM positioning data cited that “Dollar longs being added.” Readers should note that this data covered only for the week of 03-10 August. This means prior to last week’s weaker consumer data.

EUR/USD net positioning is now at its lowest level (+5% of open interest) since March 2020, when it was in the net-short territory, ING said in a report on Monday. Friday’s rally in the pair may be mirrored by some rebound in net long positions in the next CFTC report, but we doubt that markets will consistently build back bullish EUR/USD positions in the near term, as – even if the USD stabilizes along with risk sentiment – the ECB’s ultra-dovish stance should leave the EUR as unattractive from a carry perspective.

The near-term oversold technical indicators could provide some cushion at lower levels, but a decisive breakout and close above 1.19 are required to confirm the trend change. Until such time one should approach this paid on sell on rallies strategy.

Looking ahead, we will get the 1st revision of 2Q GDP for the Eurozone followed by final US CPI numbers. Besides, FOMC minutes, on the other could threaten the 1.17 support in EURUSD.

It is important to always keep in mind the risks involved in trading with leveraged instruments.

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