Euro signals downtrend on weak German CPI data

The victory of Emmanuel Macron in the French election and rising inflationary pressure coupled with positive industrial data from Europe enabled the Euro to rise against the Aussie during April and May.

The Aussie was also pulled down by the weak housing data and iron ore rout. After gaining nearly 1000 pips to reach a high of 1.5110, as explained below, the EUR/AUD pair is showing signs of a trend reversal.

A series of economic data released on Tuesday indicates that the Euro zone is still struggling to enter into growth path. Germany’s Destatis reported a 0.2% m-o-m decline in consumer prices in May.

The preliminary estimate was worse than 0.1% decline expected by analysts. Destatis also reported a 0.1% m-o-m drop in import prices in April, compared to analysts’ expectation of 0.2% increase.

New Economic Thinking

Similarly, the Spanish National Statistics Institute reported a 1.9% y-o-y growth in consumer prices in May, versus the market’s expectation of 2.1% growth. According to the flash estimate, the consumer prices increased 2.6% in April.

Earlier in May, while maintaining the benchmark interest rate of 1.5%, the Reserve Bank of Australia issued an optimistic economic outlook. Notably, in March, the headline inflation reached within 2-3 percent target range set by the central bank.

The steep fall in the price of iron ore, the largest export revenue earner of Australia, was primarily responsible for the Australian dollar’s decline. The commodity is now trading at around $60 per ton in the Singapore and China (Dalian) exchange. Citigroup analysts pointed out that the recent infrastructure spending initiatives such as ‘One Belt, One Road’ plan would boost the demand for steel by as much as 120 million tons. That is expected to keep the iron ore price from declining further.

The opinion was echoed by Mark Mobius, executive chairman of Templeton Emerging Markets Group. It should be noted that renowned Anglo-Australian miners such as BHP Billiton and Rio Tinto operate at the low end of the cost curve, with a breakeven price of between $30 and $33 per ton. Thus, considering the possible stabilization in the price of iron ore and mixed economic data from Europe, fundamentally, we expect the EUR/AUD pair to undergo a short-term correction.

The EUR/AUD pair is facing resistance at 1.5140, as shown in the chart below. Additionally, the MACD indicator is declining towards the zero line. That indicates weakness in the Euro dollar. Thus, it would be wise to stay short in the counter at this point in time.

We may exchange the Euro for the Aussie at 1.5140 levels in the currency market, in order to gain from the downtrend. To safeguard our account from large losses, we would definitely place a stop loss order above 1.5250. If the trend remains unchanged, we plan to book our profit near 1.4880.

Alternatively, we may look at the possibility of investing in a put option or an equivalent contract offered by a binary broker. We would be interested only if a contract expiring on or around Jun 9th is offered. Furthermore, a strike price close to 1.5140 is preferred.

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