Euro bulls have had to overlook some soft activity indicators recently, and we doubt there are any expectations for a near-term recovery in the eurozone’s growth outlook. Today’s PMIs should just fall in line with the other sluggish surveys, and there is a tangible possibility the eurozone composite index will fall below the 50.0 expansion/contraction mark.
The question is whether the European Central Bank will react with faster easing due to slow growth. The answer to that depends on inflation and wage dynamics, which have so far argued against the doves. Today’s ECB Negotiated Wages Indicator (for the second quarter) is a key release; the risk is that we see another disappointing print for the ECB after German wage figures were higher than expected. The first quarter print was 4.7% quarter-on-quarter, and while the headline number may decline, that may be down to one-off factors, and a closer look at the report may show the kind of underlying wage resilience that worries the ECB.
We have seen solid and stable EUR/USD bullish momentum and given the risks of a hawkish repricing in ECB rate expectations (at -70bp by year-end, they are still quite dovish), we retain a positive bias on the pair. The short-term fair value level has risen to around 1.13 in our calculations, so there is no strong technical impairment for another leg higher, in our view.
ECB minutes from July will also be published today, although the impact should be secondary to wage figures. Our near-term EUR/USD target of 1.120 is now well within reach, and the case for a break above that is getting stronger.
Francesco Pesole
