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XTB TRADEBEAT

EURUSD, DE30 - are we headed for inflationary slowdown?

Summary:

  • Euro, European indices tumble following awful PMI readings from Europe
  • EZ PMIs at the levels not seen since February 2017
  • DE30 could paint an evening star reversal formation after a rally

Goldilocks period - that’s a well know phrase to investors. It seemed to justify (or at least served as a good excuse) a twin rally in Europe - on bonds (especially peripheral) and equities at the same time. Could it now end in an abrupt way? A surge in oil prices means a risk of cost inflation. A rise of populist forces across Europe (recently in Italy) revives fragmentation risk. But at least markets had a solid economic growth to rely on, right? Well, the latest data proves this wrong, too. 

EURUSD - more downside ahead?

Fundamentally - After a stunning 2017 recovery which also led to EUR appreciation some cool down period was justified. But the PMIs are dropping like stones - 5th in row for manufacturing (lowest since January 2017) and 4th for non-manufacturing (lowest since February 2017) effectively erasing the whole 2017 gains. That’s an ugly picture for the ECB. Think of the European economy as of a huge steam engine that got rolling because of all the heat the ECB applied but just when the Bank started reducing this heat pressure it’s slowed down sharply. This in a very bad outcome for the central bank that hoped that even after fully withdrawing stimulus and perhaps even after applying some interest rate hikes the steam engine would maintain some decent speed. If it’s slowing down now, how will it respond to policy tightening that’s been expected for 2019? Sure, Markit explains that bank holidays could have contributed to some of the weakness but the decline has been steep and persistent and should be a concern. 

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European PMIs signal a strong deceleration in growth. That’s not a good sign for the euro. Source: Macrobond, XTB Research 

Technically - the pair tried to recover on Monday drawing a pin-bar off a weak 1.1715 support but that’s been already negated. The key support is at 1.1550 and bulls look very weak at present. 

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EURUSD eyes 1.1550 as the key support. Source: xStation5 

DE30 - does evening star herald a reversal?

Fundamentally - global indices rebounded sharply in April and have continued to do well in May as Trade War tensions eased and US stocks presented strong Q1 results. However, European DE30 (DAX30 futures underlying) impressed even more rallying on the back of weaker euro, rising all the way from  11700 points in late March to 13200 points yesterday morning. The reasoning was that weaker currency will help exporters and boost earnings even more. However, a weak currency is good for as long as demand is there and when German firms point to the lowest new business activity in 18 months investors should pay attention. 

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In 2017 markets enjoyed low inflation and high growth - especially in Europe. Will 2018 mark an abrupt reversal to both? Source: Macrobond, XTB Research 

Technically - the rally on DE30 has been very consistent but it’s quite possible that we will get an evening star formation today. Do notice that such formation heralded declines two times this year already an this time a break of a steep upwards trend line could reinforce a reversal. The nearest support can be found at 12600 points. 

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An evening star formation could technically herald a reversal following a strong rally. Source: xStation5 

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