The euro finished sharply lower against the US Dollar on a bad day for risk sentiment, with analysts blaming poor German CPI results for noteworthy underperformance against the British Pound. Preliminary Consumer Price Index data showed that domestic prices fell 0.6 percent in the year-ending in July—the first year-over-year decline since German unification. The CPI pullback forced a commensurate pullback in European Central Bank interest rate expectations. Yet markets have shown little interest in central bank forecasts as of late, and we believe that the Euro’s pullback had more to do with the fact that skittish speculators aggressively shed long-EURUSD trades. Indeed, we recently wrote that Forex Futures and Options data pointed to a noteworthy EURUSD pullback on increasingly one-sided positioning. Subsequent trajectory for the single currency may depend on tomorrow’s key German Employment Change figures, but it will be more important to watch reactions in risky asset classes than looking at the number itself. Though it has found a temporary base at the 1.4000 mark, any further flare-ups in market tensions could force continued EURUSD pullbacks.
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