Daily Economic Commentary: Euro zone

[PipDiddy]

After falling sharply during the Asian and morning European trading sessions, the EURUSD was able to bounce back and rally higher once the US trading session went underway. The sunk to 1.2178 before rebounding to close the day at 1.2334.

As usual, the catalyst for the drop of the EURUSD early on was risk aversion. Apparently, tension between the two Koreas escalated yesterday, which gave an excuse for currency traders to rally back to the safety of the dollar. On top of that, weakness in Spain’s financial sector is starting to hit mainstream. Heck, even better-than-expected results on the Italian retail sales (0.5% actual vs. 0.1% forecast) and the new industrial orders report (5.2% actual vs. 2.2% forecast) failed to provide support for the euro!

Thankfully, the EURUSD bears started losing steam when the US trading session went underway. The EURUSD found itself tempering its losses when the CB consumer confidence index beat expectations and triggered a slight case of risk appetite.

According to the economic calendar, the important report to keep an eye out for today is the Gfk consumer climate survey at 6:00 am GMT. The survey, which is typically used to determine how financially secure consumers are feeling, is predicted to print a reading of 3.5 for this month, lower from the 3.8 reading seen in April. Given the negative expectations on the report, we could see the EURUSD take another hit later on.

[PipDiddy]

We're going down, down... down, down... Oh sorry, I was listening to that new single by the band “The Euro Bears”! Its the new in thing! Just look at the EURUSD, which dropped 140 pips from its opening price. Will it set a new record low?

It looks like risk aversion is causing these moves in the EURUSD, and this can be clearly seen in equity markets as well as economic data released yesterday. First, equity markets on both sides of the Atalantic slid and in turn, we saw the euro fell as well. Interestingly, even when stocks rose, the euro continued to dip! It seems like traders are getting jittery over their euro holdings and one by one, are starting to dump the euros in favor of other currencies and assets.

Economic data released from the euro zone also didn't give the euro any support. The GFK German consumer climate report printed a reading of 3.5, which failed to meet the consensus score of 3.7. I don't blame the Germans for being a little less optimistic. After all, there is a lot of uncertainty regarding all the euro zone debt problems and the bail out plan itself.

Later today, the preliminary German consumer price index will be released. Consumer prices are expected to have risen by .10% from April to May. Now, a rise in consumer prices does signal rising inflation, which the ECB may take as a sign to raise interest rates down the road. However, I don't think that the markets will pay too much attention to this – the focus is really on the bailout plan. Besides, it's starting to look more and more like the euro zone's recovery may be unstable, so the ECB may look to keep interest rates at low levels in the mean time.

[PipDiddy]

Woah! This caught me by surprise... The euro enjoyed a strong rally yesterday as the latest developments on the euro zone debt situation turned out to be good news. Did you see how the EURUSD jumped from the 1.2200 area to a high of 1.2385?

Remember those speculations about China wanting to dump their Eurobond holdings? Well, China flat-out denied these allegations, easing investors' fears that the euro zone won't be able to survive the debt crisis and allowing the euro to breathe a sign of relief.

Aside from that, it seems that euro zone nations are bent on working on their own budget shortfalls, careful to avoid a repeat of the Greek debt drama. Spain's approval of its 15 billion EUR austerity plan and Italy's 26 billion EUR budget cut program sparked hopes that these nations would be able to trim their deficits soon. Traders found comfort from these news but would this feeling of calm last? I remember my buddy Forex Gump mentioned in his recent article the negative side-effects of austerity programs, which could lead to a drop in employment and slower economic activity down the line. Now that's something to watch out for...

Meanwhile, Germany seems to be doing fine and dandy as its CPI reading for May hit the target. Euro zone's largest economy reported a 0.1% increase in price levels for the month, which was a nice rebound over the 0.1% decline seen in April.

Today, Germany is set to release a report on import prices at 6:00 am GMT. Even though this report is slated to have a mild impact on the euro's movement, it might be helpful to find out if the actual figure meets the consensus of a 1.4% increase. Later on, ECB official Axel Weber is due to deliver a speech at 12:30 pm GMT. Stay tuned for his comments concerning the ongoing debt crisis in the euro zone since these could also have an effect on the euro's action.

[PipDiddy]

Just when no economic reports were scheduled to be released and you thought it was safe to go out and play, the markets were hit with some surprise news that sent the euro flailing lower once again. After hitting an intraday high at 1.2453, the EURUSD tumbled lower and finished the week at 1.2271.

The “surprise” news that hit the markets was that Fitch, an international debt ratings agency, downgraded Spain’s sovereign debt rating from AAA to AA+. Still not junk bond status like Greece’s debt, but nevertheless, this caused some traders to squirm on the edge of their seats. Once again, more bad news for the euro zone meant more euro-selling.

In other news, German import prices data revealed that German consumers are paying more for imported goods. The report revealed that import prices rose by 2.0% last month, slightly higher than the expected 1.4% increase. Is this a sign of rising inflation? If you ask me, this might just be a cause of a weakening euro. Is this a problem? Well, some analysts suggest that the weaker euro could help stimulate exports because it would make euro zone goods relatively cheaper to other countries. It’ll be interesting to see what happens if import prices continue to jump in the coming months.

Today, ECB President Jean Claude Trichet will be delivering a speech entitled “The Policy Response to the Crisis in Korea and other Emerging Market Economies”. See – even Mr. Trichet is worried about what’s happening in Korea and it’s literally on the other side of the world! My partner in crime Forex Gump recently posted something in his blog about the tension in Korea and the role of Asia in the global recovery. I’d take a look at it to gain some insight on this issue.

Aside from Trichet’s speech, lookout for the preliminary consumer price index report coming out at 9:00 am GMT. Analysts are projecting that the index has risen by 1.6% on a year-on-year basis. It looks like inflation is slowly creeping up to the ECB’s target rate of 2.0%! Still, as I’ve said time and again, given the instability in the euro zone right now, I highly doubt this would lead to speculation that the ECB will be raising interest rates any time soon.

Other reports you should keep an eye on this week are the German and euro zone retail sales and unemployment data coming out throughout the week. If these reports show more weakness in the euro zone economy, it could send the euro to new lows.

One thing I’d like to point out is that both the London and New York markets will be closed today for an extended holiday. With Spain’s downgrade still lingering in the minds of traders, we may just see some wild swings tomorrow when the Brits and Yankees come back. So for today, we may see more range like trading, but what about tomorrow? As Big Pippin hinted in his chart art today, could we be in line for a breakout soon due to a spike in volatility?

[PipDiddy]

As expected, the low liquid conditions kept the euro trading in a tight range against the dollar yesterday. The EURUSD simply paced back and forth between 1.2256 and 1.2334 before ending the day at 1.2303.

Euro zone’s preliminary consumer price index that came out yesterday fell below expectations and only printed a 1.4% rise. With euro zone’s inflation rate still far off from the 2% target and the ongoing debt problems in euro zone, the speculation of an rate hike from the European Central Bank is probably close to nil.

Today’s economic calendar presents very little to worry about, but keep an eye on a reports coming out just in case.

The reports start coming in at 6:00 am GMT, when Germany publishes its report on retail sales for the month of April. The expectation is an increase of 0.8%, opposite the 1.6% decline seen the month before. Then, at 9:00 am GMT, euro zone will release a report on unemployment. Economists predict that joblessness in the euro zone probably rose to a record high of 10.1% in April. Looks like traders will find more reasons to sell the euro…

In any case, like I mentioned yesterday, we may be in line for some drastic one-directional moves today as traders return from their long holiday weekend! Keep an eye on those major technical levels!

[PipDiddy]

The euro dropped it like its hot yesterday and hit a fresh low of 1.2111 against the greenback. Its performance against the yen was also weak as it dropped to a low of 109.77 during the US session.

Not even the strong economic reports from Germany were able to give the euro a boost yesterday. Germany posted better than expected retail sales and employment figures for April, highlighting the resilience of euro zone's largest economy amidst the ongoing debt crisis. It turns out that the 1.0% increase in German retail sales was actually spurred by the 45,000 increase in hiring during the month. After all, if more people have jobs, they are more likely to spend, right? It seems like everything's working out well for Germany...

Unlike the German economy, the entire euro zone has been taking one tough beating after another. Right now, many are worried that euro zone nation's efforts to cut down their deficits through austerity programs would eventually drag down their economic growth. Yikes, that looks like a lose-lose situation to me! On top of that, news that the ECB is also buying bonds from France gave rise to fears that euro zone's second largest economy could also be suffering from bad debt.

With no economic reports on euro zone's schedule for today, the euro could still be weighed down by speculations of a major banking crisis in the region.

[PipDiddy]

The euro managed to stave off any big losses yesterday, with the EURUSD treading around the 1.2200 handle. It looks like traders are waiting for more catalysts before triggering any big move.

The only semi-significant news that came out yesterday was the euro zone producer price index, which came out to show that producers have raised the prices of their goods by 0.9% from March to April. This marked the largest month-on-month increase this year.

Now, I believe that producer prices probably rose because of the recent slide of the euro, which actually makes the importing of foreign raw materials and supplies more expensive. In turn, producers have to raise the price of their final products to compensate for the rise in input prices.

The other big news that hit Twitter accounts around the world was that Iran would be selling off its euro reserves! Apparently, Iran's central bank will begin the first phase by selling about 15 billion euros. While this didn't move the markets too much, this is an interesting issue to keep an eye on. Remember awhile back that the euro got a nice boost once news broke out that China would not be selling its euro reserves. However, if we start to hear rumors that other central banks have plans to sell off euro reserves, it may just trigger widesperad euro selling.

We could see more movement today as the euro zone services PMI report and the monthly consumer price index report come out at 7:30 am GMT. The PMI report is expected to show no change from the previous month's score of 56.0. This would indicate that managers of service oriented business remain as confident about the economy as they did in April.

As for the CPI report, could we be in for an upside surprise? After all, yesterdays PPI report came in slightly better than expected. It'll be interesting to see whether or not we see a broad based increase in prices. Take note that last month's report showed an increase in prices by 0.3%. While I don't think traders will jump too much even if prices are rising faster than anticipated, this is something to keep an eye on down the road.

Lastly, don't forget about retail sales data due at 9:00 am GMT. After showing no growth in March, retail sales are expected to have picked up by 0.1% from the previous month. Now, with traders keeping their eyes on the lookout for more reasons to short the euro (not like they haven't found enough already!), if we see a disappointing figure in retail sales today, it may just lead to a break of the support levels that Big Pippin pointed out in today's chart art.

To recap... The euro staved off major losses yesterday, but brace yourself for biggers move to end the week, especially with all the data coming out. Also, look out for more news regarding this Iran central bank euro reserve sell off – it may just be the start of something significant.

[PipDiddy]

After rallying slightly during the Asian session yesterday, the EURUSD was sold off again on the news that Hungary could end up just like Greece. The EURUSD closed the US trading session at 1.2154, last week’s low.

According to the newly installed ruling party of Hungary, the country’s budget deficit might hit go as high as 7% of its GDP, which was almost two times the 3.8% deficit initially expected. This triggered another round of risk aversion, with the euro taking the brunt of the burn.

Data that was released failed to provide any support for the euro. Even though the services purchasing managers’ index slightly beat expectations (56.2 actual vs. 56.0 forecast), euro zone’s report on retail sales showed a drop of 1.2% for the month of April, which was opposite the 0.1% gain initially expected.

Although no high-profile economic report will be coming out from Europe today, don’t think that the euro’s price action will be unexciting! Once the US trading session kicks in, one of the most watched economic reports, the US non-farm payrolls, will be released. If you want to know more about the event, head on over to Forex Gump’s blog, as he outlines the possible effects of the release on price action.

[PipDiddy]

"Gimme a break!" yelled the euro last week. And break it did! The euro breached another key support level and fell to a low of 1.1955 last Friday as the debt situation in the euro zone worsened.

How low can the euro go? It seems that not even the ECB or the G20 are willing to stop the euro's fall since the weakening currency could be beneficial for the euro zone nations. In fact, the French Prime Minister even remarked that parity between the euro and the US dollar could be good news. After all, a cheaper euro could make euro zone exports much cheaper and more attractive to other nations, which could eventually boost economic activity in the region. Aside from that, a weak euro help push inflation closer to the ECB's target.

But that's not all... News of Hungary's possible default also weighed the euro down last week. Even though Hungary isn't really part of the euro zone, another European debt crisis in the works sparked fears of a debt contagion all over again. It didn't help that risk aversion, which resulted from weaker than expected US non-farm payrolls figures, forced investors to flee towards the safe-haven US dollar.

Updates on the euro zone debt condition could once again determine the direction of the euro this week but don't forget to stay tuned for upcoming economic reports! A few low-key reports, namely the German factory orders and industrial production figures, are on deck for today and tomorrow respectively. Germany's factory orders are slated to post a 0.1% dip in April, unable to sustain its stellar 5.0% gain in the previous month. Meanwhile, industrial production could post a mere 0.7% uptick, which pales in comparison to the 4.0% growth seen previously.

The main event for this week is the ECB's rate statement on Thursday 11:45 am GMT. The central bank is expected to keep rates on hold a 1.00% but traders are probably more interested to hear about the policymakers' thoughts on the euro's depreciation. Comments favoring the euro's weakness could push the currency even lower this week.

[PipDiddy]

With no major news or surprises yesterday, the EURUSD didn’t tumble down much further, as it only fell 50 pips from its opening price. Is the EURUSD about to find a bottom?

I’m not too sure about a bottom quite yet, as traders are still cautious over the state of the euro. After all, it’s starting to look like Hungary might be following Greece’s footsteps! Even though Hungary is not part of the euro zone (although it was planning to!), any concerns of debt problems from any European country could cause a ruckus as this is the main focus of the markets right now. I’ll keep y’all posted on any developments on this matter.

The only data that was released yesterday were German factory orders, which came in much better than expected. The report printed that orders rose by 2.8% in April, after they were expected to have fallen by 0.1%. Now, I suspect that this may be an effect of the cheaper euro. A cheap local currency helps stimulate demand because it effectively makes export goods more affordable.

We’ve got more German data on tap later, as industrial production data is due at 10:00 am GMT. Industrial production is projected to have picked up by 0.7% in April. Seeing as how we got a nice surprise from factory orders, can we expect the same in today’s report?