EurUsd Weekly Outlook for September 4, 2023 – A Shifting Landscape

• The Fed starts to notice early signs of a slowing economy, confirming a likely pause in interest rate changes for September.
• In Europe, inflation data in some parts of the continent are rising above expectations. This increases uncertainty for the September ECB meeting, but the euro remains under pressure.
• The contraction of the spread between U.S. and European government bonds diverges from the dollar’s rising trend against the euro. Meanwhile, the 200-day moving average shows its first cracks.

Mixed Signals: Navigating the Complex Economic Landscape in the U.S. and Europe

Markets have closely observed the cooling macroeconomic data in the United States. This includes both the job market data, which indicates a slowdown in wage growth rates and thus inflation (though not in the number of new jobs), and those related to the housing market. The first effects were seen in the revision of the Q2 GDP data, which was lower than the expected 2.4% (the data came out at 2.1%).

Perhaps the real data that shocked the bond markets was consumer confidence, which literally plummeted. Impacted by rising fuel prices in the height of summer, Americans lowered their confidence by 10 points, moving from 116 to 106. This is the lowest number since May and also reflects repeated interest rate hikes by the Fed.

The highly anticipated employment data in America nevertheless confirmed the economy’s robustness, with the creation of 187,000 jobs in July. However, the unemployment rate rose to 3.8%. Wage growth rates also slowed down to +0.2% from the previous +0.4%. The stock market reacted positively, interpreting these data as reducing pressure on the Fed.

Christine Lagarde had warned markets at Jackson Hole. Inflation is not yet conquered in Europe. Indeed, data from Germany and Spain exceeded analysts’ expectations. As we will see shortly, this was not enough for a euro recovery, especially because credit is increasingly struggling to flow downstream.

The ECB is now faced with the dilemma of how to act in September regarding interest rates. This decision could fuel speculation on EurUsd, as we will discuss shortly.

Technical Analysis – EurUsd and European Credit Crunch

The first significant signs of credit contraction noticed in Europe have started to weigh down the euro, anticipating a premature halt in interest rate hikes by Lagarde. The M3 money supply data for June, declining by 0.3% against an expectation of zero, harks back to the times of the Great Financial Crisis. The effects on inflation should not be delayed, even though the numbers do not seem to confirm this. Both core and headline data at 5.3% in August confirm that the decline has stalled.

As clearly seen from the graph where EurUsd is plotted on a black line with an inverted scale, the exchange rate has ceased to move in sync with the spread. While the dollar has reached new highs, the interest rate differential has not widened in favor of Treasuries. Which Indicator Is Misleading?

The 200-day moving average has so far done an excellent job of containing EurUsd, but it is now under pressure for the first time, closing below the dynamic support. Are we completing the third rising low, or are we facing a new and sensational bearish breakout?

The restoration of the uptrend for the euro will inevitably have to go through a rise above 1.08, categorizing the current movement as a bear trap. Only in the case of climbing above 1.12/1.13 could the euro aspire to return to the 1.20 zone.

On the flip side, should there be a confirmed breach of the 1.08 level this week—a level that also coincides with the 200-day moving average—1.03 would emerge as the next target, potentially marking the end of the EurUsd bull market.