In our article last week, we were looking for a sell-off in EUR/USD and we have seen prices move lower and have extended our downside target down to 1.0700...
We are coming into the ECB with speculators heavily long the euro and short the USD which means limited upside and plenty of downside – the trend is down and we think it has further to run.
The Interest Rate Outlook
below is a summary of the likely scenarios in terms of the euro's reaction to the ECB meeting and we think the INGTHINK base case scenario is right.
The zone is already heading for recession EVEN if the ECB didn't hike again but the market is looking for 2 hikes and they will get one at best and the ECB will be more cautious and dovish in their views than the market expects in our View.
Euro Zone Economy Facing Recession
Since our last update, the data out of euro zone has continued to show weakness in the zone.
Yesterday Germany the powerhouse of the eurozone: The HCOB Germany Manufacturing PMI dropped to 38.8 in July 2023, down from 40.6 the previous month and well below forecasts of 41.0. The latest reading signaled the steepest rate of fall in the manufacturing sector since the end of the COVID pandemic in May 2020...
More bad news - the HCOB Germany Composite PMI fell to 48.3 in July 2023 from 50.6 in June and below forecasts of 50.3. The reading pointed to the first contraction in private sector activity so far this year and the biggest since November, with manufacturing production falling at the fastest rate since May 2020, amid rapidly declining demand for goods. Also, the upturn in services activity continued to lose momentum as growth slowed to a five-month low amid a renewed fall in inflows.
Today we had bank lending figures: “The second-quarter bank lending survey indicates that monetary tightening is having a significant effect on the lending channel. This adds to economic weakness for an economy that is already stagnating” (ING) It is lending to both businesses and consumers is the lowest since 2011.
EUR/USD Bullish Sentiment at an Extreme
The ECB will be mindful of the problems in the economy and in our view will fail to meet speculators' view that the ECB will be hawkish. Speculators are heavily long as we can see on the charts below
Speculators are also heavily long in the options market which we can see on the chart below.
The outlook for interest rates is also pointing to a lower EUR/USD...
Our view of the big levels of support and resistance to look out for on the chart below