Daily Economic Commentary: Euro zone

[PipDiddy]

After breaking through key support in the middle of last week, the EURUSD was able to recuperate much of its losses last Friday as traders reacted favorably to news coming out of the EU summit. After hitting a low of 1.3268, the EURUSD rose back up to end the week at 1.3408.

Greek leaders jumped for joy when European leaders, most notably those from Germany and France, agreed on a bailout package which would include some help from the IMF. This gave support for the euro, which had been on a roller coaster ride the past couple of weeks as the markets weren't quite sure what would happen.

Still, some feel that the aid provided may not be enough. For one, word on the European grapevine is that only € 20 billion will be provided, while €75 billion is needed. Secondly, there are some uncertainties as to what exactly the IMF's role will be in this assistance package. I'm interested to see whether this could be the start of more unity in the European Union... or if the bickering will start again if more concerns pop up down the line.

Today, euro zone consumer price index figures are due, with reports expected to show an increase in prices of 0.3% in the past month. A better than expected figure would be welcome, its impact on the market will probably be muted, as investors and traders are still focused on the bailout package.

On Wednesday, we've got some unemployment data coming out. Euro zone unemployment is expected to have risen from 9.9% to 10.0%. If we see a worse than expected figure, could it send the euro tumbling back to its yearly lows?

[PipDiddy]

The EUR was still on recovery mode yesterday as it climbed against the USD and JPY. Aside from the slow return of investors' confidence in the EUR, strong economic reports were also able to push the EURUSD towards the 1.3500 handle and keep the EURJPY above the 124.00 mark.

Germany's CPI printed a nice 0.5% increase, outpacing the forecast of a 0.3% uptick. This pushed their annualized CPI to 1.1% in March. Oil prices, which rose by 66% from the previous year, led the increase. However, analysts say that inflation is expected to remain subdued during the year.

Meanwhile, consumer confidence in the euro zone held steady in February. Now that's quite a feat, considering how the Greek debt crisis could've caused consumers' financial outlook to worsen. What kept consumers optimistic was the recent surge in euro zone's exports, spurred by the decline of the EUR in the past few months. Coincidentally, this depreciation was mostly a result of Greece's debt concerns. Funny how it all worked out for euro zone...

No economic reports are due from the euro zone today, which could make for relatively calm movement among the EUR pairs. Keep an eye out for the release of the US consumer confidence report, which is slated to print an improvement. Better than expected results could boost risk appetite and allow the EUR to go for more gains.

[PipDiddy]

The EUR tumbled vis-à-vis the greenback after reaching a high of 1.3538 late in the Asian session. The EURUSD pair then slid to close the day lower at 1.3414 from 1.3480.

The euro zone did not publish any major economic reports yesterday. The EUR, however, weakened when less than half of the Greek bonds that were auctioned were sold. Remember that Greece needs to raise €53 billion, €20 billion of which will be used to pay their dues for the month of April and May. If Greece continues to struggle in raising some funds from the market then they will have no choice but to run to the IMF and to the other EU-member nations for aid.

Germany’s unemployment change in March will be coming off the press later at 7:55 am GMT. German firms are seen to have slashed another 10,000 jobs on top of the 7,000 during the previous month. Still, Germany’s jobless rate is expected to be steady at 8.2%. The overall jobless rate in the euro zone, however, is projected to have worsened to 10.0% from 9.9%. An uptick in unemployment could place a lot of pressure in spending and, therefore, would be detrimental to the economy and the EUR.

On a separate news, euro zone’s flash year-over-year CPI estimate in March will also be accounted for. The general prices in the euro zone likely reached 1.1% from 0.9%. A gain in the CPI is usually bullish for the EUR. However, given Greece’s debt situation, it is unlikely for the ECB to raise its rates in the in the near future as doing so would place Greece in a much deeper hole.

[PipDiddy]

Thanks to the combination of good euro zone data and ugly US labor figures, the EURUSD was able to stage a magnificent rally in yesterday’s trading session. The pair closed out the US session at 1.3506, almost 100 pips higher from its Asian session opening price.

Germany’s unemployment change released yesterday revealed that the number of unemployed people in February was reduced by 31,000 from the month before. This was a welcome surprise for the euro bulls because the forecast was for an increase of 10,000. Speaking of unemployment, euro zone’s labor market report also showed yesterday that joblessness in the 16-nation zone went up to 10.0% in February from 9.9% the month before just as expected.

In other news, euro zone’s flash consumer price index estimate for March was an increase of 1.5%, better than the 1.1% rise initially expected. Remember, since rising inflation usually leads the European Central Bank to raise interest rates in the future, the unexpected jump gave the bulls another reason to buy up the euro.

For today, the only important data to watch out from euro zone is Germany’s retail sales report at 6:00 am GMT. The expectation is that there was no change in retail sales in February from the month before. If the actual figure comes in positive, we could see the euro find some buyers once again today.

By the way, most of euro zone's banks will be closed tomorrow in celebration of Good Friday so we could see some volatility towards the end of the European session later as traders close shop for the long weekend.

[PipDiddy]

Woooooo! It was a pretty quiet trading day, but once the US NFP report released favorable figures, the euro took a hit as traders bought up the dollar. The EURUSD ended the day below the 1.3500 handle.

With the European markets still closed today, it is possible that we may see sentiment carry over from last Friday. With the thin liquidity, we could see some exaggerated moves, so be careful out there!

The big news to watch out for this week will be the ECB rate decision on Thursday. As usual, the ECB isn't expected to raise rates, but that doesn't mean we can take some time off and have a pan con chocolate at your favorite boulangerie.

Watch out for comments made by ECB President Jean Claude Trichet and other ECB members, more specifically anything about Greece. Remember, Greece isn't out of the woods yet – they still need to raise some more funds before May and things aren't looking too good right now. If Trichet shows some concern about Greece's (and the euro zone as whole) fiscal status, we may see euro bearishness from recent months kick off the new quarter.

In other news, German factory orders and industrial production figures will be released on Wednesday and Thursday respectively. Factory orders are expected to have dipped by 0.9% in February, while industrial production is seen to have maintained growth of 0.7% in the same month.

[PipDiddy]

Ouch! The euro took a few hits from the greenback and the yen yesterday after the Greek debt drama made a reprise. Argh, I thought these conflicts were over and done with already!

The EURUSD fell to a low of 1.3460 while the EURJPY tumbled to the 127.00 handle as Germany seemed to emerge as the antagonist in the Greek debt tragedy. It turns out that the largest nation in the euro zone is demanding that higher interest rates be charged on loans to Greece. To help the heavily indebted nation, most euro zone countries have been willing to lend at 4% to 4.5%, which is the same rate that Portugal and Ireland pay on their loans. However, big brother Germany declared that Greece should pay 6% to 6.5% on borrowed funds since it has a higher risk of default. Greek Deputy Prime Minister Pangalos retorted, saying that Germany's unwillingness to help is a result of racial issues. Why can't they all just get along?!

The euro was unable to draw support from any economic reports yesterday since, well, its economic calendar was empty! Today the Sentix investor confidence report is due at 4:30 am GMT. This report could show that the reading for April climbed from -7.5 to -5.9, indicating that investors' pessimism is slowly fading. Although a better than expected figure could lift the euro, conflicts surrounding the Greek aid plan could continue to limit the euro's gains. Also keep an eye out for the release of the US FOMC minutes at 2:00 pm GMT since this could determine the direction of the EURUSD.

[PipDiddy]

The euro woke up on the wrong side of the bed again yesterday as it slid against the greenback and the yen. The EURUSD fell to and settled at 1.3406 from 1.3480. The EURJPY also declined to 125.63 from 127.14.

The euro zone’s Sentix investor confidence index for the month of April came in better than expected at 2.5 versus the -5.9 forecast. Despite this, the euro continued to fall because of some reports from Market News International that Greece may not look for the IMF’s help after all. Greek Finance Minister George Papaconstantinou, however, replied that they have not attempted to revise their rescue plan to keep out the IMF. Whether or not this is true, one thing is for sure. That is, there is still a lot of confusion surrounding Greece’s debt issue.

Germany’s February factory orders will be released later at 10:00 GMT. Orders are seen to have slipped by 0.8% in February after gaining 4.3% during the previous month. A drop here could give the euro another blow.

[PipDiddy]

The unexpected revision on euro zone's GDP gave the chance for the euro bears to shine yesterday. The EURUSD closed the day at 1.3344, more than 60 pips lower from its opening price during the Asian trading session.

The GDP report yesterday showed that euro zone actually failed to grow during the final quarter of 2009, rather than growing by 0.1%. For the entire 2009, euro zone's economy shrunk 2.2%.

It wasn't all bad news though. Germany's factory orders released a couple of hours later managed to beat expectations. It showed that orders in February was flat, instead of falling by 0.8% like initially expected. January's reading was also revised up to 5.1% from 4.3%.

Euro zone's economic cupboard today is overflowing with data.

First up, at 9:00 am GMT, euro zone's retail report will come out. The expectation is that retail sales were flat in February, a slight improvement from the 0.3% decline seen the month before. Following shortly at 10:00 am GMT is the German industrial production report. The forecast is a rise of 0.7% in February,up from the 0.6% increase seen in January. The positive expectations on the reports could help the euro regain some of its losses.


Lastly, at 11:45 am GMT, the ECB will announce its decision on interest rates. It is widely expected that interest rates will be kept at 1.00% so traders will be more focused on the accompanying statement. Watch out for any Greek debt talk, as it has been a very hot topic as of late. If ECB President Jean-Claude Trichet starts talking down the problem again, we could see the euro find some buying support.

[PipDiddy]

It looked like the EURUSD was going to test former lows, but some positive comments from the ECB helped the pair avoid bigger losses. After diving below the 1.3300 handle, the EURUSD came back up for air, closing at 1.3349.

In yesterday's European Central Bank press conference, President Jean Claude Trichet focused on Greece's debt issues. As excepted, Trichet tried to talk down the problem, expressing confidence that the Greece will be able to handle its budget issues and will be able to avoid a credit default. Quite frankly, his comments aren't surprising at all – he is after all, the president of the ECB and would naturally do all he can to calm down fears that Greece's debt issues may spill over onto other euro zone countries.

Meanwhile, the ECB kept rates steady at 1.0%. As long as we keep hearing debt news prop up from the likes of Greece, Portugal and Spain, this will continue to hinder the ECB's efforts of unwinding all its stimulus packages.

In other news, euro zone retail sales and German industrial production figures came in worse than expected, which led to the euro's demise early in the European session. Retail sales fell by 0.6% in February, after it was expected to have remained steady. German industrial production, on the other hand, showed no growth during the same month, after consensus was for an increase of 0.7%. Boy, imagine if Trichet didn't deliver those upbeat comments – we could have seen the EURUSD hit a new yearly low!

We may see more range bound trading today, as we've only got French industrial production figures on deck at 6:45 am GMT. Industrial production is seen to have risen by 0.2% in February, but seeing as how the German account came in worse than projected, could we expect the same in the French version?

Do watch out at the end of the European session, as Trichet will be speaking once again. He will be talking about economic crises and global governance, but you never know, he may just drop some comments about Greece once again.

[PipDiddy]

Finally! The Greek bailout plan seems to be underway now that EU officials are seeing eye-to-eye in terms of securing a joint IMF and EU aid package. Ironically, it was Fitch's downgrade of Greece's credit rating that elicited this united response from the EU.

Despite Greece's sovereign debt downgrade from BBB+ to BBB-, the euro soared against the greenback and closed just 6 pips shy of the 1.3500 handle last week. Recall that Greece has been thinking of securing funds on its own but this credit downgrade lessens the chances that they'll be able to do so. Now that their risk of default is higher, Greece will have a tougher time selling their bonds and will most likely avail of the aid package from the IMF and EU. Over the weekend, EU finance ministers pledged 30 billion EUR in aid for the heavily indebted Greece. Today, another meeting will be held to iron out the other details of the bailout plan.

Economic data from the euro zone was mixed last Friday as Germany printed stronger than expected trade balance figures while France's industrial production reading missed the consensus. Germany's trade surplus grew from 8.7 billion EUR to 12.1 billion EUR in February, spurred by a sharp rise in exports. Meanwhile, French industrial production stayed flat in February after rising by 1.1% in the previous month.

Now let's take a look at the economic reports on deck for this week... Today, only the Italian industrial production figure is due. Although this report is slated to have a minimal effect on the euro's price action, a stronger than expected figure could provide support for the euro.

Tomorrow, a few low-key inflation reports are due starting 6:00 am GMT. The German final CPI reading for March is expected to be 0.5% while their wholesale price index for the same month could post a 0.2% uptick. French CPI, which is due 6:45 am GMT, is also projected to be at 0.5% for March. These could set the stage for the overall euro zone CPI due Friday.

Euro zone's industrial production figure is set for release on Wednesday 9:00 am GMT. The report could post a 0.3% increase for the month of February after seeing a larger 1.7% growth in January.

Trade balance figures from Italy and the euro zone are due Thursday this week. Italy's trade deficit is estimated to narrow from 3.36 billion EUR to 2.37 billion EUR in February, reflecting an improvement in exports during the month. Euro zone's trade surplus could narrow from 7 billion EUR to 5.1 billion EUR in the same month. Stay tuned for these reports at 9:00 am GMT.

Lastly, euro zone's March CPI reading is expected to land at 1.5%, same as in February. It's annualized core CPI for the month could come in at 0.9%. While stronger than expected reports could allow the euro to pocket more gains, developments in the Greek bailout situation would also affect the euro's movement this week. Keep your eyes and ears open at all times!