Was the euro saved by lower volumes?

German preliminary Q2 GDP came out at +0.2 per cent (quarter on quarter) and is up one per cent on the yearly basis. Despite the eurozone’s largest economy still managing growth, it was not enough to avert a contraction for the larger eurozone group. As a whole, the eurozone’s preliminary GDP reading slipped into contraction – actual figures came out at -0.2 per cent (quarter on quarter) and -0.4 per cent on the yearly basis.

The eurozone averted a technical recession in Q1 of this year thanks to a flat reading after a -0.3 per cent decline in the last quarter of 2011 (two consecutive quarters in contraction would technically be called a recession). Yet another negative reading for the second quarter reminds us that weakness persists and the ongoing debt issues continue to weigh on sentiment. Analysts already expect another contraction for the third quarter, but the real issue is that contraction will continue to make the ongoing fiscal adjustment throughout the eurozone feel bitter.

On Monday, news that Greek Q2 GDP contracted by less than expected helped support for the euro. Figures came out at -6.2 per cent (year on year) against the expected -7.6 per cent (year on year) and the previous -6.5 per cent (year on year). The EUR/USD spiked to 1.2373 throughout the European session, after levels close to 1.2295 prior to the release around 11.00 CET. On Tuesday, Greece also had a go at tapping liquidity markets; Athens managed to sell €4.06 billion of three-month bills – well above its targeted €3.125 billion.

EUR/USD has remained captive of the combination of a lack of high importance data or events, and the thinning volumes as the summer lull reaches the forex markets. The euro saw most of the Draghi boost fade away by mid-last week, but remained resilient as the lack of momentum capped decisive price action.

Draghi had pledged earlier this month that the ECB would do whatever it takes to save the euro, but the lack of details offered in the news conference, after the ECB’s last policy meeting, left investors disillusioned.

The quieter volumes and a relatively stable market situation typically lead investors to park their funds in better yielding currencies like the AUD and the CAD, for example. The euro has enjoyed some short covering as investors squared back some of the more bearish positions held at the end of last week. Those investors who had opted for the higher yielding currencies such as the AUD and the CAD had the opportunity to cash in on some of the profits made against the euro throughout last week.

The EUR/USD continues within the longer term bearish trend that has accompanied the currency pair since May 2011. A look at the daily charts suggests that, for the current week a daily close above the 1.2430 region could expose 1.25/1.2520 region. On the other hand, a bounce off this 1.2430 area could see the pair head back towards 1.2150.

From month start up to the time of writing the British pound is up 0.21 per cent against the US dollar while it loses 0.19 per cent to the euro. We had the BoE’s quarterly inflation report last week were the BoE reduced its short term growth forecast and left its inflation expectations mostly unchanged.

Yet the highlight for the GBP were comments from the BoE’s governor who seemed to suggest that any further monetary stimulus would likely come in the form of more quantitative easing rather than take the shape of a rate cut. This lent support to the GBP against both the euro and the US dollar.

Last Tuesday inflation data out of the UK came out higher than expected, and even the retail price index manifested a similar reading. As data hit the wires the GBP/USD briefly rose to 1.5728; thus marking two-week highs for the currency pair. Sticky inflation would presumably hinder the BoE’s inclination to increase stimulus efforts. This in turn is a currency positive – at least for the immediate term.

Gold performed well last week: it managed five consecutive winning days and support pushed prices to highs of $1,626.61 yet, as I’ve said on another occasion, $1,635 remains key in the near term. Technical studies suggest that a daily close above $1,635 could expose $1,674 levels, where the metal should meet significant resistance and bounce lower in the intermediate term – unless, of course, if it manages to break $1,674.

Upcoming FX key events
Today: EZ HICP, US Philadelphia Fed index.
Tomorrow: German PPI , Canadian CPI, US Michigan consumer sentiment.

Technical key points
EUR/USD is bearish, target 1.2000, key reversal point 1.2550.
EUR/GBP is bearish, target 0.76 key reversal point 0.80.
USD/JPY is neutral.
GBP/USD is neutral.
USD/CHF is bullish, target 1.0050, key reversal point 0.96.
AUD/USD is bullish 1.08, key reversal point 1.04.
NZD/USD is bullish target 0.83, key reversal point 0.7850.

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Mr Muscat is a senior trader at RTFX Ltd.