Wednesday, April 29, 2015

Euro was on fire yesterday | Catalyst was poor US Q1 GDP

The Single Currency was on a tear yesterday against all its major counterparts, including the US dollar, Pound Sterling and the Japanese yen. The Harmonised Index of Consumer Prices (in other words, inflation figures), for Germany, showed that the most important economy in the Eurozone had year on year growth in consumer prices that exceeded expectations. At 0.3% the y-o-y number has some way to go to reach the 2% level that the ECB would like, but at least it is off the floor and oil prices, the largest driver of deflation, are starting to rise.

Catalyst was poor US Q1 GDP

The catalyst for the Euro rise yesterday was a poor reading of US Gross Domestic Product for Quarter 1 2015. This is on top of lower than expected retail sales, durable goods, inflation stateside and manufacturing PMI. Yet the consensus view of economists is that the quarter one readings are all transitory in nature and will not be given excessive weight by the FOMC when it comes to deciding on interest rate rises. In other words, as always, the committee takes trends into account, not single data points.

The FOMC statement accompanying last evening’s interest rate decision (no change) reiterated the sentiments outlined above. This provided some stability for the Greenback after a period of losses after the GDP figures were released.

The Euro is having its day in the sun and it might as well be enjoyed. In the meantime Greece is still there, as is the reality of Eurozone QE. It will be the expectations of the beginning of interest rates rises in the US that will determine the medium to long term outcome – and they are coming, sooner or later.

Technically, as can be seen on the EURUSD daily chart above, the exchange rate still has quite a climb to bring it to the 200 day Exponential Moving Average (EMA), which at a minimum it would have to breach in order to confirm any change in trend to the upside.

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