Daily Economic Commentary: Euro zone

[PipDiddy]

So long 1.3000! EUR/USD had been able to close above the major psychological handle for a couple of times in the past few months, but it looks like the euro didn't have Lady Luck on its side yesterday. The pair tapped its 4-month low at 1.2911 before ending the day at 1.2947, 65 pips below its opening price.

The political drama surrounding Greece continued to weigh down on the shared currency. Yesterday, a couple of German officials hinted that their patience is already running low for the debt-ridden country. It was announced that only 4.2 billion EUR of the 5.2 billion aid package for Greece will be released for now. Whether or not the Greeks will get the remainder of it will be determined by the government's ability to implement the previously-agreed austerity measures.

And as though the news wasn't enough to upset investors, Spanish bond yields spiked above 6% too which only sparked funding concerns for the region's fourth largest economy. Yikes!

It seems that risks of a Grexit and a contagion still remain to be the primary driving factors behind price action. But I wonder if perhaps economic reports from the euro zone will be able to sooth investors to some extent and help the euro pare some of its losses. Well, that is if they come in better-than-expected.

Today's roster of economic data start off with the French industrial production report for March at 6:45 am GMT. It is eyed to come in at -0.4%.

Then at 8:00 am GMT, we'll have the ECB monthly bulletin on tap. The report details the statistics reviewed by the central bank before it made its most recent interest rate decision as well as its economic outlook. If it proves to be more hawkish than expected, we could see the the euro rally. So watch out!

[PipDiddy]

Just when it looked like euro pairs were revving up for a bounce, risk aversion popped its head back in the markets and kept the euro's gains in check. Still, EUR/JPY deserves mad props for putting an end to its losing streak and ending 40 pips up from its 103.09 open price. EUR/USD managed to trim its losses and close only 4 pips down from its 1.2948 open price.

Euro zone economic data came in mixed yesterday as France printed weaker than expected industrial production data while Italy chalked up a surprise 0.5% uptick in its version of the report. What really moved the euro yesterday was the drop in Spanish bond yields, helping alleviate funding concerns for euro zone's third largest economy.

However, it wasn't long before Greek political problems took center stage and weighed on the euro again. As it turns out, the odds aren't looking too good for a coalition government yet many are hopeful that the third try would be the charm for Greece. Otherwise, they'd have no choice but to hold another round of elections next month, which would mean more political uncertainty for the country and more volatility for the euro.

There are no economic reports due from the euro zone today, which means that euro pairs could be moved by risk sentiment and news from the euro zone, particularly in Greece. Stay on your toes!

[PipDiddy]

For the seventh time in eight trading days, the euro finished weaker last Friday, as EUR/USD closed 21 pips lower at 1.2923. For the week, EUR/USD finished just over 100 pips below its weekly opening price. Will the euro continue to slide down the charts this week or can it make an unlikely comeback?

The major reason why the euro took an old school, back-alley beating last week was due to concerns surrounding Greece. With the New Democracy, Syriza, and Pasok political parties failing to form a coalition government, the chances of a Grexit are becoming higher than if you were to bet on the outside lines on a roulette table!

For today, we’ve got euro zone industrial production figures due at 9:00 am GMT. Expectations are that production picked up by 0.6% in March, which would be a nice follow-up to the 0.8% uptick we saw in February. If this comes in better-than-expected, it could provide the euro some nice support to go on a Monday rally.

Don’t forget that we’ve also got some Italian bond auctions during today’s London session. It should be interesting to see whether all the recent developments in the euro zone have taken its toll on Italian yields. Take note that the last auction resulted in yields of 5.84%. If we start seeing Italian yields creep back above 6.0%, it may trigger another run of risk aversion in the markets!

[PipDiddy]

This is turning into a bloodbath! EUR/USD marked its FIFTH losing day yesterday as risk aversion reared its ugly head in the markets again. EUR/USD closed the day at 1.2836, 72 pips lower from its opening price.

Just like the previous days, risk aversion was the result of Greece’s political chaos. President Papoulias' talks failed to create a unity government in the first round of talks yesterday which the speculation of a “Grexit.” Negotiations will continue today, and if that falls through again, we may see EUR/USD experience another sell-off.

On the economic front, there are a couple of medium-tier data scheduled for release.

Between 5:30 am GMT and 9:00 am GMT, the different members of the euro zone will release their GDP reports. First is France’s, then Germany’s, then Italy’s. The market expects the GDP report for the entire euro zone to show a 0.2% contraction.

The ZEW economic sentiment survey will also come out. It will publish at 9:00 am GMT and is predicted to print a reading of 11.7. If the actual reading beats forecast, we could see EUR/USD recover some of its losses.

[PipDiddy]

So much for making a comeback! After hitting an intraday high at 1.2871, EUR/USD came crashing down to finish at 1.2729, down 106 pips from its opening price. What rocked the euro’s socks this time around?

First we had mixed data from the euro zone.

Euro zone GDP figures were generally better than expected, as German GDP grew 0.5% last quarter, which was way higher than the projected 0.1% increase. Meanwhile, euro zone GDP figures printed a big fat 0%, but this was still better than the predicted 0.2% decline.

However, the German and euro zone ZEW economic sentiment reports both printed worse-than-expected, coming in at 10.8 and -2.4 respectively. Early estimates were for readings of 19.1 and 11.7. This indicates that sentiment in the euro zone is deteriorating, as economic conditions worsen and contagion fears are returning.

The straw that broke the euro’s back yesterday though was news that Greece would be holding a new election in June. Since the Syriza, New Democracy, and Pasok can’t get along, the Greek government felt it would be better to just have another election for Parliament seats. This news sent the euro sinking quickly during the latter part of the London session.

For today, we’ve got CPI figures on tap at 9:00 am GMT. Word on the street is that headline inflation will clock in at 2.6% while headline inflation will print a figure of 1.5%, which would in line with what we saw last month. If these figures come in lower-than-expected, it could give the ECB some room for more quantitative easing measures, so make sure you tune in and listen for the results!

[PipDiddy]

Talk about having a bad week! Euro bulls lost to the bears for the seventh day in a row yesterday. EUR/USD sank to its 4-month low at 1.2682 before ending the day at 1.2709, 20 pips below its opening price.

But I guess you can say that the euro has seen worse days. It only suffered a measly 9-pip loss to the yen as EUR/JPY closed at 102.06. In fact, it even scored a win against the pound. EUR/GBP ended yesterday's trading at .7989 after opening at .7958.

Perhaps the relatively positive roster of reports that we got from the region yesterday helped the euro limit its losses. We saw that the region-wide CPI remained steady at 2.6% in April and came in just as expected. Excluding volatile items, the core reading topped expectations by 0.1% when it printed at 1.6%. The region's trade balance also came in in-line with forecasts, showing that exports outpaced imports by 4.3 billion EUR, indicating an improvement in March from February's 4.0 billion EUR trade surplus.

Don't start thinking that Europe's debt woes have gone away though! The ECB announced yesterday that it stopped providing cash to some Greek banks that were extremely undercapitalized and instead put them under an emergency liquidity assistance program.

Of course, the news only intensified fears of a Grexit.

With that in mind, it's noteworthy to mention again that the losses which the euro suffered yesterday weren't as severe as what we've seen earlier on in the week. Could it be possible that markets are starting to price in a Greek exit from the euro zone and we could see the currency rally soon? Or could the euro's price action yesterday signify nothing more than just a pullback?

Hmmm, it might be too early to say. But perhaps paying attention to the shared currency's performance in today's trading will give us more insight on my little theory.

Our forex calendar is blank for reports from the euro zone today. But I bet we'll have more juicy updates regarding Greece. So keep an ear out, folks!

[PipDiddy]

Rough day for the euro, as EUR/USD tested new lows at 1.2670, while EUR/JPY sank over 120 pips to establish new lows at 100.70. Can the euro pare some of its losses or will the beatings continue today?

The euro was hobbled yesterday as 10-year Spanish bond yields popped back above 6.0% Meanwhile, Spanish bank Baxia, which was bought out by the government recently, just saw 1 billion EUR vanish off its balance sheet as depositors withdrew their funds. This doesn’t bode well, as not only does this mean that consumers are afraid of leaving their money in the bank, but the bank will also have a harder time lending and carrying out its operations.

Contagion fears are beginning to emerge again so make sure you keep an eye out for more developments from Spain, as this could spur on risk aversion.

Today we’ve got the German PPI figures due at 6:00 am GMT. Expectations are that producers paid 0.4% more for their raw materials last month. Remember, this is another indicator of inflation, as producers normally simply just pass any additional production costs to consumers. If it comes in lower-than-expected, it may indicate that inflation remains subdued in Germany.

[PipDiddy]

Finally, the euro's losing streak ends at eight! EUR/USD closed last week 72 pips above Friday's open at 1.2776. Meanwhile, against the yen, the euro was able to score a 35-pip win at 101.02. What turned around the shared currency's luck?

Nothing much really. In fact, there were actually more bad news in the headlines for Europe last Friday.

For one, the German PPI report for April came in lower at 0.2% versus the 0.4% consensus. Even worse, Italian and Spanish 10-year bond yields spiked up to 6.05% and 6.35%, respectively. This happened following the announcement of renowned credit rating agency Moody's of downgrading several Italian and Spanish banks. Yikes!

Some analysts say that investors might have only taken profits on Friday and the excitement over the Facebook IPO might have helped the euro push higher.

With that in mind, they warn that we could see the euro get sold off even further this week especially since there really weren't any significant decisions made to address the debt crisis during the G8 meetings over the weekend. They could be right, so be sure you be careful, ayt??

[PipDiddy]

Thanks to a little bit of market optimism from the G8 meetings over the weekend, the euro was able to continue rebounding and post another winning day against the safe haven dollar. EUR/USD closed out the day at 1.2816, 33 pips higher from its opening price during the Asian session.

Last week, sentiment in the foreign exchange market was at a low point as Greece’s political problems led to a lot of speculation of a “Grexit.” But during the G8 summit, European leader showed positivity as they reaffirmed the importance of Greece remaining in the euro zone. Moreover, the leaders also discussed ways to strengthen growth in the euro zone.

Since there are no red flags on euro zone’s forex calendar today, I only see two likely scenarios for the euro today. The first one is that the euro will continue to gain as the “short squeeze” continues. The euro has been severely oversold and traders may start taking profit.

The second possible scenario is that the euro will simply consolidate. Market sentiment seems to be mixed now. One the one hand, a “Grexit” is still in the cards but on the other hand, European leaders want Greece to stay in the euro zone.

As for a complete reversal… Well, I don’t see the euro rallying strongly just yet. The macroeconomic environment hasn’t really changed and I don't see any major catalysts today.

[PipDiddy]

And it returns! No, I'm not talking about the Dark Knight. I'm referring to good ole risk aversion! The euro found itself crashing again as EUR/USD fell from the 1.2800 area and closed at 1.2680. EUR/JPY, on the other hand, tried to rally from its 101.63 open but was rejected at the 102.00 handle.

As Forex Gump predicted in his article reviewing the G8 summit and the bout of optimism that followed, the risk rallies were bound to be short-lived. The euro sold off prior to this week's EU summit as it appears that traders are losing hope about a resolution to the Grexit scenario.

You see, newly-elected French President Hollande and German Chancellor Merkel just can't see eye to eye when it comes to deciding the best plan of action to take. On the one hand, Hollande believes that Greece should aim for economic growth and that introducing Eurobonds could help alleviate the situation. On the other hand, Merkel insists that austerity measures are the key to solving the crisis and remains completely against the idea of Eurobonds.

It didn't help that former Greek Prime Minister Papademos started blabbing about Greece's preparations for exiting the euro zone, convincing market participants that this possibility is slowly turning to reality.

As for economic data, both the industrial new orders report and the current account balance are set for release from the euro zone today. After slipping by 1.2% in February, industrial new orders are expected to dip by 0.1% for March. Meanwhile, the current account deficit of 1.3 billion EUR in February is expected to turn into a 4.7 billion EUR surplus for March. However, these reports aren't expected to have a huge influence on the euro's movement today as all eyes and ears are on the EU summit. Stay on your toes!