Premium Forex Watch Recap: September 30, 2024

This week our FX strategists focused on the Eurozone CPI update and the US Manufacturing PMI update for possible high-end setups.

Of the four discussions on price scenarios/outlooks this week, in one discussion, both substantive and technical arguments were probably triggered to become a potential candidate for a trading and risk management overlay. Check out our review of those talks to see what happened!

Watchlists are discussions of price perspective and strategy supported by both fundamental and technical analysis, a crucial step towards creating a high quality discretionary business idea before working on a risk management and trading plan.

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EUR/GBP Hourly Forex Chart from TradingView

On Monday, our currency strategists set their sights on the upcoming Eurozone CPI release and its potential impact on the euro. Based on our Event Guide for the CPI Flash reports for the euro area, markets expected headline inflation to come in at 1.9% y/y (up from 2.2% previously) and core inflation at 2.7% y/y a (unchanged from the previous one).

With those expectations in mind, here’s what we thought:

The “Euro Surge” scenario:

If the CPI were higher than expected, we thought this could reduce the pressure on the ECB to cut rates in October. We thought this could attract fundamental EUR buyers and had our eye on EUR/CAD for potential long strategies, especially given the pair’s recent upward momentum and recent signals from the Bank of Canada.

The “Euro Slide” scenario:

If eurozone inflation fell less than expected, we anticipated that this could raise expectations for an ECB interest rate cut in October. We considered EUR/GBP for potential short strategies as the pair was testing resistance at the top of a recent range and the Bank of England had maintained a dovish stance due to relatively sticky inflation conditions in the UK.

What actually happened

Well, folks, Tuesday spread and the Eurozone CPI decided to throw us a mixed bag of results. Flash estimates from Eurostat showed that the annual rate of inflation in the euro area fell to 1.8% in September, down from 2.2% in August and slightly below expectations of 1.9%. The core inflation rate remained steady at 2.7% y/y, in line with expectations.

Key points from the CPI report:

• Energy prices continued to be the main driver of disinflation, falling 3.3% y/y
• Food, alcohol and tobacco inflation eased to 5.4% from 6.4% in August
• Services inflation eased to 4.1% from 4.4%
• Non-energy industrial goods inflation remained stable at 4.1%

Market reaction

The initial market reaction to the CPI release marked a general weakening of the euro. While core readings from the CPI flash update showed relatively high rates of inflation, the overall number below 2% plus weak Eurozone PMIs were likely the main factors for the day’s decline.

Looking at our EUR/GBP chart, we can see that the pair initially saw a small decline, but found buyers just above the S1 Pivot support area. This week’s risk-averse sentiment may have played a role in putting pressure on risk assets such as the pound, sparking choppy behavior in EUR/GBP heading into Thursday’s session.

On Thursday, BOE Governor Bailey surprised markets with a dovish turn in sentiment toward future interest rates, saying the central bank could ease aggressively if inflation remains low. This pushed the pound off a cliff in one of its worst days of the year and EUR/GBP up above a massive 3 daily ATR.

verdict

So how did I do it? In our initial discussion, we mentioned potential short setups on EUR/GBP if Eurozone CPI came in weaker than expected, which it did. But the broad risk-off environment favored low-yielding assets such as the euro over riskier assets, putting a lid on any downside moves this week.

Additionally, surprise comments from Bank of England Governor Bailey sent Sterling down this week, making any short EUR/GBP highly unlikely to recover, except for those shorting the area resistance R2 Pivot.

So, overall, we would rate this discussion as ‘unlikely’ to support a potential positive outcome, as while the weak Eurozone CPI update initially put pressure on EUR/GBP, external factors such as the risk environment and central bank comments pushed the price up far beyond discussion. levels and trigger levels to probably hit most invalidation arguments if good trade management practices were used.