European currencies strengthened against the dollar yesterday, with similar gains for the pound — a sign that Friday's strong US payrolls print has already been fully discounted. Traders have moved on to price in inflation data later this week and, ahead of that, the European Central Bank meeting on Thursday; those who hadn't already priced in a rate hike are catching up now.
Monday was quiet because of US Labor Day closures, but the euro area produced a notable data surprise. Q2 GDP was revised up to 0.6% quarter-on-quarter (EU: +0.7%), formally outpacing US growth of 0.4% in the same period. On the surface, it looks like a European turnaround, but the composition of growth tells a very different story.
Net exports contributed 0.9 percentage points to eurozone GDP, household consumption just 0.2 points, while government spending and gross fixed capital formation were negative, subtracting 0.5 points overall, according to Eurostat. In other words, growth is entirely export-driven; domestic demand barely participated. Exporters and capital?goods producers benefit, while retail and consumer-facing services lag.
There is plenty of recent evidence to back that view. Eurozone retail sales plunged by 0.6% in July instead of the expected 0.3% rise, after a 0.3% decline the month before. Employment rose by a token 0.1% for the quarter, and yesterday's German report showed a sharp 1.1% drop in industrial production versus a consensus for +0.1% and after a +0.2% increase in June. For these reasons, I don't consider the upward GDP revision a signal of a durable recovery: the bloc's expansion today is an export-led bubble, and once external demand slows while domestic components fail to pick up, overall eurozone growth will likely retreat.
Why, then, is the euro rising on these stats? Because the picture reads differently for the ECB. A 0.6% quarterly expansion reduces the case for the ECB to remain accommodative, turning the revision into an argument for tightening to combat inflation. That expectation supports the euro now, while market participants defer the problem of weak industry and consumption. The winners under this view are euro holders. The losers are German industrial firms that face lower output at the same time as tighter monetary conditions.
Today's calendar is light on both sides of the Atlantic. For the euro area, German and French external trade balances are due — precisely the items underpinning the recent growth — so they deserve attention. There are no other major eurozone or UK macro prints, so the focus will shift to speeches from Bank of England and ECB officials and parliamentary hearings on the BoE's monetary policy report. US statistics are limited to small-business sentiment and consumer credit volumes, neither of which are likely to move FX markets materially.
Technical view
EUR/USD: On the 1-hour chart, in case of a rally, I am looking to sell at 1.1641 if a false breakout forms, targeting a drop to 1.1621. If sellers fail at 1.1641, defer short positions to 1.1650 on a failed hold or sell on a rebound from 1.1673, targeting a 15–20 pip move. For buyers, the critical level to defend is 1.1621. A false break below that level would be a cue to add long positions in continuation of the bullish phase that began on September 2. If bids are absent at 1.1621, wait to buy until 1.1601 (or buy a rebound from 1.1587) with the same 15–20 pip target.
GBP/USD: The pound sterling faces a similar setup but is capped by the resistance level of 1.3545, a mark tested four times. A break and consolidation above 1.3545 would open the way to 1.3573, with a further extension to 1.3596 where I would look to sell on a rebound for a 20–25 pip move. Short entries into rallying moves toward 1.3573 would be valid on a false breakout at 1.3545. In that case, I expect the pair to remain range-bound and to test the support levels of 1.3521 and 1.3501, where buying is prudent only if those levels fail to hold. I would consider buying on a rebound near 1.3480, targeting a 20–25 pip target.
Outlook
Through Thursday, I give the edge to the buyers of risk assets, the euro and pound.Friday's nonfarm payrolls report has been priced in, and there is no fresh dollar catalyst until the inflation data, while the ECB meeting works against the dollar in EUR/USD. In the coming sessions, I expect renewed attempts by EUR/USD to push to the upper end of its range. For GBP/USD to follow suit, the pound needs to overcome the 1.3545 mark, a move unlikely without a clear signal from the Bank of England.
