Investors Continue to Ignore European Central Bank President’s Alarm on the Zone’s Bleak Business Climate

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By Jameel Ahmad

 

Despite the EU economic sentiment remaining bleak and European Central Bank (ECB) President Draghi reaffirming his displeasure with an elevated EURUSD only last Thursday, investors remain undeterred from purchasing the EURUSD. The pair recorded a second consecutive day of gains and advanced to 1.3611.

This increase in valuation materialized despite disappointing economic releases. For the second day running, all spotlight was on Germany and in continuation with a recent unfamiliar pattern, their metric data raised a few eyebrows. On an adjusted monthly basis, imports contracted by 3.4% (sharpest decline in nearly two years) with exports also contracting by 1.1%.

The GBPUSD pair marginally increased in valuation to 1.7130; however, this was not withstanding a rollercoaster of volatility. Following last week’s Markit Manufacturing PMIs cataloguing its highest reading since November 2013 an assessment that the sector was currently “flourishing”, optimism was high for Tuesday’s Manufacturing Production reading. Unfortunately, the bulls were thwarted.

The GBPUSD dropped around 60 pips following the surprising news that on a monthly basis, manufacturing production contracted by 1.3%. Industrial Production followed a similar pattern, recording a 0.7% monthly contraction. As the day progressed, further losses were spared and the GBPUSD subsequently bounced back when June’s NIESR GDP estimate showcased that UK second quarter economic growth increased to 0.9%, up from 0.8% in the previous quarter.

Moving onto the USDJPY and despite metric data releases from both countries being low, this pair collected its third day of consecutive losses. The USDJPY dropped 30 pips and concluded trading at 101.565. This was likely linked to Monday’s announcement that Japan’s Trade Deficit narrowed slightly in May, alongside Deputy Bank of Japan Governor Nasako displaying confidence during a speech in Tokyo that the Japanese central bank will be internally prepared to deal with withdrawing from Quantitative Easing.

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The Aussie continues to show resilience in spite of dovish comments from RBA Governor Stevens last week that investors were underestimating the chances of a significant fall in the Australian currency. The Australian economy received a boost, following the announcement that Westpac Consumer Confidence rose 1.9% in July to 94.9 and the AUDUSD concluded trading at 0.9357.

Finally, the NZDUSD reached its highest valuation since August 2011 after credit ratings agency Fitch Ratings reaffirmed the country’s AA rating and upgraded its outlook from stable to positive. The NZDUSD increased as high as 0.8804 on the announcement and concluded trading at 0.8785. The 0.88 level has previously been viewed as a psychological resistance level for the pair and in April, a dovish speaking RBNZ threatened implementing currency intervention methods to prohibit investors purchasing their currency.

The New Zealand central bank are unlikely to verbally threaten currency intervention yet though, and will likely wait to see whether tonight’s Federal Reserve FOMC Minutes release inspires risk appetite into the currency markets.

This could be a story that develops as we head into the next trading week.

Ahmad is chief market analyst at FXTM.

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