Chance of retesting 1.1100 – ING

French CPI surprised yesterday, but the global investor community quickly agreed this was down to a short-term boost to services from the Olympic games, which translated into a likely spurious boost in the eurozone-wide surveys. The news from Germany was instead quite grim, as both manufacturing and services slowed more than expected and the composite index fell further into contraction to 48.5, ING’s FX strategist Francesco Pesole notes.

EUR/USD to break below 1.1100 short term

“We have repeatedly highlighted how that does not matter hugely for the euro as long as inflation and wages prevent large cuts from the ECB. The Bank’s own measure of negotiated wages slowed from 4.7% to 3.6% in 2Q, but swap rates and the euro did not really react to the release as German wage data released earlier this week painted a much more worrying picture, and there is a strong suspicion the decline in eurozone negotiated wages might be due to one-off factors.”

“Incidentally, the PMI report showed German output charge inflation was the highest since February. Markets remain comfortable with pricing slightly less than one cut per ECB meeting by year-end (69bp in total), and things may not change until the next batch of key data releases move the needle again.”

“EUR/USD has room to climb in the coming weeks, but investors may use an unexciting Powell speech today to lock in some profit and have the pair re-test the robustness of the 1.1100 support. The ECB CPI expectations report this morning is expected to show a marginal decline from 2.8% to 2.8% in the one-year gauge, and may not move the market significantly.”