Euro Area Super Core Inflation Down to 2-Year Low
The volatility in the international financial markets decreased dramatically following the U.S. elections. Stocks in the U.S. trade close to the highs, while the FX market barely moves. It feels like the markets are in need of an early Christmas break, as everyone wants to put 2020 behind as quickly as possible and to get back to normal life as it was in 2019.
If that is possible or not, in 2021, it remains to be seen. As for the complacency in the financial markets, it is nothing new nor specific to this year.
Every year the price action on financials surrounding Black Friday and Thanksgiving is a lull. More precisely, especially during the Thanksgiving week, the price action on major currency pairs trends will not change. Instead, trends in place will continue to push in the same direction.
Having said that, the way the FX market ends this week is crucial, for next week is Thanksgiving week. If reversals are less likely during the Thanksgiving week, based on historical analysis, then traders would be better off by sticking to the main trends at the end of this week.
Strong Euro Despite Weak Fundamentals
The theme for the summer and the fall this year was a strong Euro. That is particularly true in the case of the EURUSD rate.
The major pair reached 1.19 and above and did not leave the area for several months now. In the meantime, the European economy deteriorated rapidly. Lockdowns risks tilted to the downside, the prospect of more easing, ECB verbal intervention – were not enough to send the EURUSD lower.
However, it depends on what side of a trade one is. Bulls may argue that the stickiness to the 1.19 area is a strong sign for further gains. Bears, on the other hand, may argue that the inability to hold above 1.19 is a sign of weakness.
Yesterday’s Eurozone core inflation added further data to the bearish case. The core inflation remains just shy above the deflationary scenario (0.2%, slightly above the zero level that means deflation). More importantly, the super core inflation, the one that is calculated from a subset of HICP, slowed to a 2-year low. Such inflation has a direct relationship with, or it feeds into, the Euro area output gap.
In other words, bearish as bearish can be. On top of that, the ECB pre-committed to act in December. So why is the EURUSD not lower?
The answer lies within the question – this is an exchange rate, showing the value of one currency in terms of another. While one may be bearish on EUR, if the USD falls more, the EURUSD exchange rate will eventually move to the upside.