The euro was mostly flat yesterday, but is strengthening this morning. The currency continues to look overbought in the short-term. While inflation numbers announced yesterday met or exceeded expectations, the impact on the euro was limited. Headline inflation met expectations (1.4%) while core inflation exceeded expectations (1.1% vs. 0.9% expected). Looking at news, German coalition talks remain a risk for the euro. According to Reuters, the discussions have gone past the Thursday deadline as issues including migration and finances remain contentious. Wolfgang Kubicki, deputy leader of the FDP, claimed that he was "extremely frustrated" as talks are progressing very slowly. While the outright failure of coalition discussions is limited, the euro is likely to weaken if Merkel fails to build a coalition.
The EUR/USD exchange rate is now trading above 1.180. Looking at EUR/JPY, the pair is down today and is currently trading just above 132.80. The euro is down against the pound, with EUR/GBP now trading above 0.8910.
This is a critical week for the Eurozone, given that both GDP and inflation numbers will be announced. Eurozone GDP numbers met expectations (2.5%) while industrial production numbers beat expectations (3.3% vs. 3.2% expected). German GDP growth (2.3% vs. 2.3% expected) and inflation figures (1.5% vs. 1.5% expected) both met expectations. Eurozone trade balances were strong and beat the prior print (€26.4b vs. €16.1b prior). French CPI figures met estimates (1.2%). Headline Eurozone inflation met expectations (1.4%) while ex-food & energy numbers beat expectations (1.1% vs. 0.9% expected). Last week, Eurozone retail sales, composite PMIs and producer prices all beat expectations.
After running out of steam, we are downgrading the currency to neutral in the short-term. Looking at various technical indicators, the currency is looking overbought. This is based on a daily chart of the euro currency index.
As the euro rebounds following the disappointment of the recent ECB meeting, we are upgrading our outlook to neutral. While the currency looked overbought earlier, this is no longer the case today and the euro is trading within normal ranges. Our analysis is based on various technical indicators when looking at a weekly chart.