EUR/USD Outlook:The clouds are getting thicker over the European banking system

FUNDAMENTAL

As August comes to an end, the clouds are getting thicker over the European banking system. The efforts to deny the fragile situation of banks at the core of Europe didn’t work out. Here are 5 updates.

Will this affect EURO/USD? The pair is currently at the top of the range 1.45 series.

1) Urgent recapitalization from the head of the IMF:  European banks need urgent funds and that action should be taken quickly.They must be strong enough to withstand the risks of sovereigns and weak growth. This is key to cutting the chains of contagion. If it is not addressed, we could easily see the further spread of economic weakness to core countries, or even a debilitating liquidity crisis
2)  More emergency funding from the ECB: Yet again, an unnamed European bank needed a helping hand from the ECB to get dollars. Is it a German bank ? 
$5m were provided on morning August 25 from ECB to a German bank otherwise this bank was in default,
3) Radical plan for banks: Reports are coming in that EU officials are scrambling to make a radical plan for bank Why? Severe liquidity problems:
Without citing sources, the paper said officials from the European Central Bank and European Commission are considering offering central guarantees over certain types of debt issued by banks. The paper goes onto say that the move comes after a number of European banks where shut out of international money markets.
4) European banks are highly leveraged: German banks are leveraged 32:1. That’s higher than Lehman’s 31:1 and before the recent crunch and the the agreement for Greek restructuring.The official number for France Societie General is 28:1. Not much better. Unofficial numbers are far worse.

5) Trichet denies: “Don’t believe a rumor until its denied”. The president of the ECB denied a problem in the same conference:
Referring to the ECB’s extended long-term financing operations, Trichet said banks have more than enough collateral and said “the idea that we have a liquidity problem in Europe is plain wrong  because of this non-standard measure we have taken.”
Are you convinced that the Non standard measures solved the liquidity problem? In the past, Trichet has strongly rejected certain ideas or actions, but was forced to retreat later on. Perhaps the radical plan will be launched soon.

Technical
In Europe, more signs of slowdown are evident, with two surveys pointing lower. Is Trichet ready to lower the rates? In his speech in Jackson Hole, he left no clues. EUR/USD is trading at around 1.45, just under the 1.4540 resistance line. This is the top of a range that accompanies us for a few months. But what will happen if the banking system freezes in Europe?The upcoming week is very busy

1. German CPI: Monday. The German states release their initial CPI estimates throughout the day. After a relatively strong rise of 0.4% last month, the slowdown and the fall in commodity prices is now expected to be reflected in no change in prices.
2. German Retail Sales: Wednesday Europe’s largest economy enjoyed a big leap sales volume last month – 4.5%. A big fall is expected now – 1.5% – a fall that will correct the previous leap.
3. German Unemployment Change: Wednesday, The slowdown in German growth is also felt in the job market. The drops in unemployment fell in the past months. A drop of 10K is predicted now, similar to last month’s -11K.
4. CPI Flash Estimate: Wednesday,The all European rate of inflation surprised with a drop to 2.5% last month – also reflecting the slowdown. The same pace is expected to be kept now. A drop towards the official target of 2% will weaken the euro. We have already seen core inflation drop.
5. Unemployment Rate: Wednesday, The euro-zone’s unemployment rate stood on 9.9% for quite a long time – 5 months. No change is likely now. There is a big difference between countries like Germany which have a single digit unemployment rate, and countries like Spain with above 20%.
6. German Final GDP: Thursday,GERMAN growth significantly slowed down in Q2  according to the first release – only 0.1%. This will probably be confirmed now. Revisions are not common.
7. Final Manufacturing PMI: Thursday According to the first release, the euro-zone’s manufacturing sector dipped into contraction zone. The score of 49.7 points, under 50, means that the sector is squeezing. This will likely be confirmed now.
8. PPI: Friday, Germany surprised with a big and unexpected jump in import prices. This will probably be seen in producers prices for the whole zone – a rise of 0.6% is estimated now.

I remain bearish on EUR/USD.
I recommend a sell on these levels upto 4680 because the interpretation of a possibility of QE3 gave a boost to the euro, but the situation in euroland is far from normal. The core is weakening, and the peripheral countries are still struggling.

Regards

M.Zohaib Gadit

Forex Trading Consultant, Shivani Financial