Date: 06 Feb 2019

The eurozone economy posted another batch of soft economic data on Tuesday, pointing to a worsening slowdown of economic activity happening inside the trading block. The overall eurozone services sector remained weak, while EU retail sales contracted -1.8 percent during the last month of 2018.

December is traditionally a strong month for European retail sales, due to the holiday season and new year spending; the decline highlights the current lack of disposable income and the inflationary pressure inside the euro area. Underlying inflationary pressures are likely to remain subdued due to the reduction of central bank stimulus, slowing global economy and ongoing Brexit uncertainties. Core eurozone inflation is also likely to consistently undershoot the European Central Bank’s inflation targets during the rest of 2019.

The ECB may have to backtrack on dialling down its quantitative programme this year and maintain a highly accommodative monetary policy stance if the eurozone economy starts to slip into an actual recession. Economic data from last week showed the Italian economy slipping into a recession during the second half of 2018, with the nations GDP declined by 0.2 per cent during the final quarter of last year, marking its second consecutive fiscal quarter of contraction.

The French economy is also looking vulnerable to a recession in 2019, the full effects of the anti-establishment yellow-shirt protests have yet to show up in France’s data and quarterly GDP numbers. The German economy is also experiencing troubles from a prolonged slowdown in its manufacturing sector and the spill over effects from Sino-US trade tariffs.

German industrial production and export data for the last month of December will be released later this week, while next month we see the first official reading of German fourth fiscal quarter GDP, with most economists forecasting that Europe’s largest economy contracted -0.2 per cent during that period. A worse than expected German GDP figure will likely send the single currency lower and cause many market participants to question the European Central Bank’s current monetary policy stance.

 

EUR/USD Daily Candlestick Chart | Source: ActivTrader Platform

EUR/USD Daily Candlestick Chart | Source: ActivTrader Platform

 

The euro currency has been gradually moving lower against the US Dollar since the release of stronger than expected jobs figures from the United States economy last Friday. If sellers can sustain bearish pressure below the 1.1410 level another test of the important 1.1300 support level appears likely.

Buyers have been failing to keep the EUR/USD pair above the 1.1500 level this year, as traders currently see few reasons to be bullish on the euro currency given the lack of inflationary pressure and deteriorating EU data. The 1.1460 level provides the strongest point of near-term resistance for the EUR/USD, while the 1.1570 is a major level to watch if the 1.1500 level is broken with conviction of the medium-term.

 

Written by Nathan Batchelor, External Analyst

 

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