Limited potential for further EUR/USD drop.

EUR/USD

• Euro zone HICP inflation amounted in July to 0.4% yoy, below market consensus of 0.5% yoy and in line with our expectations. It was the weakest annual rise since October 2009. Energy prices fell by 1.0% yoy in July after a 0.1% rise in June, while prices of services were up by 1.3% yoy (growth rate was unchanged vs. the previous month).
• July’s fall in inflation was mainly driven by further falls in the food and energy components. We expect that downward effects on inflation coming from food and energy may start to fade over the coming months. Core inflation – which excludes energy, food, tobacco and alcohol costs – stood unchanged at 0.8% yoy, also in line with our forecast.
• June’s labor market data were slightly more optimistic, with the unemployment rate falling from 11.6% to 11.5%, which is the lowest rate since September 2012. However, there is still no pressure on wages due to a lot of spare capacity in the labor market.
• The European Central Bank holds a policy meeting on Thursday next week. In our opinion there will be no signals of further easing. The bank will probably say that more time is needed to assess the impact of its latest measure on the real economy. We see that the market is effectively loosening policy for the ECB in flattening of the yield curve and further EUR weakness.
• The EUR/USD did not react on lower-than-expected HICP reading. In our opinion the potential for further fall of the EUR/USD is low. We expect tomorrow Nonfarm Payrolls data to be lower than market consensus (ADP increased the likelihood of weaker reading).

GBP/USD

• British house prices rose in July at the slowest pace since April last year, gaining just 0.1% mom vs. growth by 1.0% mom in June and market consensus of 0.5% rise. On an annual basis, house prices rose 10.6% (which in our opinion is still high level) compared with 11.8% in June and median forecast of 11.3%.
• BoE Deputy Governor Ben Broadbent said markets were obsessing too much on when the first rise in interest rates might come and missing the important message that any tightening would be gradual. He noted that due to high levels of household debt in Britain we should be careful when raising rates. Asked if he agreed with the IMF view that the GBP may be overvalued by more than 10% Broadbent said it was “quite possible.” However, he emphasised that it was not the level of the exchange rates that worried him but the sluggishness of economic growth in Britain’s major trading partners that was depressing their currencies.
• Stop-loss selling helps depressed the GBP/USD below 1.6870 after breaking below 1.6890. A strong support is 100-DMA at 1.6858. The GBP/USD has been traded above this barrier since February 5. Breaking below this level would be a strong boost for the GBP/USD bears, who are targeting 1.6844 (June 6 top) now.
• We suggest long position on EUR/GBP near 0.7920 with the target of 0.8020 at stop-loss at 0.7875.

We encourage you to subscribe to our daily fundamental macroeconomic analysis newsletter to read the full version of our analysis right away.

Thank you for reading.

Growth Aces