Week started with slightly positive German CPI followed by slightly negative European GDP. Industrial production was also negative in EU as well as negative US retails sales. Positive numbers for Initial jobless claims in US but Reuters/Michigan consumer sentiment index came negative. At the end of the week Mario Dragi repeated well known "What ever it takes" phrase on IMF meeting.
For me no surprise that US industrial production and more importantly Consumer sentiment came negative last week. If rate hike is seen as a signal of prosperity and strong economy, what it would mean to people when they hear news like Rate hike postponed to September or numbers are not supporting rate hike. I bet people can feel that FED is not really seeing improvements in the economy,so people are left worried.
Given the fact that DAX is highly weighted on export oriented companies high levels of EUR is the last thing producers want to see. Not surprisingly DAX is falling as EURUSD is rising. But EURUSD is rising more that DAX is falling. This disproportion can expose DAX to more and chances of stronger decline over next few days should the EURUSD get closer to 1.15 mark.
With recent EURUSD appreciation let's analyse in nutshell what caused EUR to go up. Is it that more people are buying EUR?Do you think people have forgotten divergence monetary policies in EU and US? I think investors went to quick to hard on selling side of EURUSD and now are just rebalancing portfolios. We can actually see on reports what people are not going long EURUSD they just reducing short positions. Not EUR is improving but long USD positions are reducing.
Rising EURUSD is also the last thing Mario Dragi wanted to experience given the fact of millions EUR being pumped into the economy to stimulate the growth. Eventually he will need to step up and maybe bring another phrase similar like "What ever it takes" to talk down the value of EUR.
Same applies for FED as their hesitation signalling consumers, producers and investors that US economy is not ready yet. People than buy less, save more; producers produce less with lower credit exposure and investors do not support a view of improving US economy neither.
It will be critical to see price action of EURUSD and if breaks above 1.15 levels DAX can easily break below11200 as previous rejection of 50% Fib zone suggests retest this and given the overvalued DAX compare to EURUSD , DAX can extend decline to test 50% Fib February rely around 10800 levels.
If EURUSD stays around 1.145-1.15 range we can expect DAX trapped within a range of 11200 and 116500 this week unless we will be given significant information during FOMC meeting of ECB meeting this week where both will have a chance to talk up/down their currencies.
Given this I see EURUSD increasing slightly towards 1.15 - 1.155 mark until Mario Dragi will signal to the market again their intention to bring the value of EUR down.