Daily Economic Commentary: Euro zone

[ForexGump]

The euro fell against the dollar last Friday as market’s appetite for risk took a pause. The EUR/USD pair closed the week at 1.4892, more than 50 pips lower from its Asian open at 1.4936.

Data that came out from euro zone failed to provide support for the pair as well. Euro zone’s trade balance, which measures the difference in value of imported and exported goods, only showed a 1.0B euro surplus for August, more than five times lower from the 5.1B euro forecast. Digging into the report reveals that the lower-than-expected figure was primarily caused by the 5.8% decline in exports.

The important report to watch out this week is the German Ifo Business Climate for October. It asks businesses on their opinion on the direction of the economy for the next six months. A reading of 92.1 is expected, slightly higher than the previous month’s 91.3. It is due on Friday, 8:00 am GMT.

Also keep an eye out for company earnings! If earnings come out higher than expected, we might see investors drive the EUR/USD pair higher on account of risk appetite.

[ForexGump]

After trading lower in the Asian session, an empty calendar didn’t stop the EUR from jumping higher against the USD throughout the European and US sessions. The EURUSD pair closed trading at 1.4942. Hmmm... it seems like the 1.5000 price level could be the next target in sight...

It seems that the EUR is jumping all over dollar weakness, as some analysts believe the USD will continue to suffer as the US Fed keeps rates low. If the Fed continues to have a bearish outlook on the US economy and keeps rates low, analysts believe that the long term trend will be toward dollar weakness and that investors will keep looking for higher yielding assets.

Today, we've got the German PPI m/m report coming out at 6:00 am GMT. The report - which measures the changes in prices of manufacturing goods - is a measure of inflation and is expected to show steady prices from the previous month. It isn't normally a high impact report but nevertheless, keep an eye out for it.

Aside from that report, nothing else is on deck over the next couple of days for the Euro zone. I would expect that EUR trading will continue to be driven by degrees in risk sentiment. Watch out for traders gearing up for more earnings reports coming out from the US! Good luck trading!

[ForexGump]

The EURUSD attempted to hit the 1.5000 mark yesterday but fell short by just a few pips. Soon after, it tumbled down as German PPI came in worse than expected. Weak PPI numbers from the US triggered a run of risk aversion, which pushed the EURUSD much lower.

After previously showing signs of emerging from deflation, Germany's PPI reading was a disappointment as it posted a 0.5% decline in September. The consensus was that producer price levels would hold steady for the month after printing a 0.5% uptick in August.

It also didn't help that ECB President Jean Claude Trichet was once again airing out his anti-EUR comments while another ECB official called the strong EUR a "disaster".

Later on, the US reported weaker than expected PPI and housing market data. This caused the EURUSD to dip below the 1.4900 mark to an intraday low of 1.4882.

No economic reports are on today's agenda but watch out for changes in risk sentiment that could affect the EURUSD pair. Several earnings reports are due from the US today and these could shift the markets back to risk tolerance mode.

[ForexGump]

The EURUSD pair logged in another yearly high in yesterday’s price action. It went as high as 1.5047 before losing at 1.4998. Will the pair finally break above the psychological 1.5000 handle?

No economic reports were due in the euro zone yesterday. Though, the positive earnings from some US firms like Morgan Stanley and US Bancorp buoyed the markets together with the “anti-dollars” for the most part of the US session.

In the mean time, euro zone’s current account balance will be released today at 9:00 am GMT. The CA surplus of the 16 European member nations’ broad economy is seen to fall to €1.9 billion from €6.6 billion. A slide in surplus could suggest that capital inflows have slowed during that period perhaps due to the recent strength of the EUR. Such could reflect negatively on the economy and could place some downward pressure EUR at least in the short term.

[ForexGump]

It seems that buying support remains strong in the EUR/USD as it traded in a U-shaped manner in yesterday’s trading session. The pair dipped during the afternoon Asian session but managed to fight back and end positively against the dollar once the European session rolled along.

As I mentioned yesterday, the euro’s current strength is indeed putting some downward pressures on their current account balance. The current account balance for September, which was released yesterday, went negative to negative €1.3 billion, much opposite the positive €1.9 billion forecast.

However, the Belgium NBB business climate survey improved to -14.2 from -17.8 the month prior. It Although still in the negative territory, it has consistently showed improvement in the last eight months indicating that businesses are getting less and less pessimistic about euro zone business conditions.

For today, the important reports due are the German Ifo business climate survey, euro zone services and manufacturing purchasing managers’ index (PMI) at 8:00 am GMT and the new industrial orders at 9:00 am GMT.

The German Ifo business climate survey for this month expected to print a reading of 92.1, which would be an improvement from September’s 91.3 figure. Meanwhile, the prediction euro zone services and manufacturing PMI are 51.4 and 50.2, respectively. Remember, a reading above the “line in the sand” number of 50.0 indicates that the industry is expanding. Lastly, new industrial orders in August probably increased again – this time by 1.25.

If these reports come out better-than-expected, we could see investors buy up the euro before they close shop for the weekend!

[ForexGump]

The euro weakened versus the dollar in Friday’s trading, as the dollar benefitted from a fall in equities. The EURUSD closed just below the key threshold of 1.5000. Was this merely another round of Friday profit taking? Or could this set the tone for this week?

The EURUSD pair was unable to make any headway above 1.5000 as there wasn’t much reaction to all the data that came out on Friday. Euro zone manufacturing and services purchasing manager’s indexes both exceeded projections, with readings of 50.7 and 52.3 respectively. The indexes were expected to have readings of 50.2 and 51.4. This marked the highest level in the manufacturing PMI since February 2008.

Industrial orders also showed a nice improvement , as new orders rose by 2.0% during the month of August. It was expected that orders would only rise by 1.2% in the month.

German IFO business climate also rose to its highest level in over a year. The index had a score of 91.9, up from September’s score of 91.3. This though, was slightly less than the projected 92.0 score. It appears the government officials are being more optimistic over the economy, and are predicting economic growth of 1.2% in 2010.

Despite the rosy picture painted by the data, it seems that traders took cue from a fall in equities. In turn, risk aversion took a big swing and hit on Friday. Let’s take a look at what’s coming up and see if the euro can recover tits losses.

Later today, the GFK German consumer climate report is due at 7:00 am GMT. The report is expected to rise slightly from last month’s score of 4.3, to 4.5 for the month of October. Given that last week’s PMI reports showed increased optimism from business managers, lets see if this sentiment has carried over on to consumers.

On Wednesday, some inflation data will be available as the preliminary consumer price index report will be available. Consumer prices are projected to have risen by 0.1% in the past month. This would help quell some fears regarding inflation, as the index showed a 0.4% decline in the previous month.

[ForexGump]

Just as the EURUSD was starting to feel at home above the 1.5000 mark, the greenback staged a strong rally which sent the EURUSD tumbling down by more than 150 pips. The German GfK consumer confidence reading, which failed to meet the consensus, was unable to provide support for the EURUSD.

German confidence fell for the first time in 14 months as the GfK consumer confidence index slid from 4.2 to 4.0. The index was expected to climb to 4.5 in October. Components of the index show that, although consumers' overall economic outlook improved, income and spending expectations deteriorated. This implies that German consumers expect their country's economic situation to improve but they doubt whether these improvements will trickle down to consumers.

Data on M3 money supply and private loans are on today's docket. M3 money supply is expected to print a 2.1% year-over-year increase while private loans are projected to decline by 0.2%. The actual figures are due 9:00 am GMT but these reports are expected to have a minimal impact on EUR price action.

[ForexGump]

The EUR, the fabled “anti-dollar,” continued to slide for the third consecutive day against.. yes.. the greenback in yesterday’s currency tug-of-war. After marking a fresh yearly high at 1.5063 early this week, the fiber is now down to the 1.4800 handle again.

The euro zone’s y/y M3 money supply in September slowed again to 1.8% from 2.6%. This account measures the change in the total quantity of domestic currency in circulation and deposited in banks. A growth in money supply allows for additional spending and investment which could lead to a hike in the interest rate in the longer run. The slowing figure, therefore, indicates that liquidity is tightening which could badly impact spending and investment especially now that euro zone’s CPI is way below the ECB’s 2% target.

The EUR continued to slide against the dollar following the report.

Today, Germany’s preliminary CPI will be published. Though, the time of release is tentative. Germany’s m/m headline inflation figure for the month of October is seen to be at 0.1% from the -0.4% reading during the previous month. An increase in the general prices of goods and services could give the EUR some support at least in the short term. However, we could be up for a negative surprise given the unexpected 0.5% drop in Germany’s PPI covering the same period.

[ForexGump]

The euro took another beating from the dollar yesterday as risk aversion continued to surge for the third day this week. The EUR/USD pair is currently trading around the 1.4700 handle and could revisit 1.4500 soon if risk aversion persists.

The German preliminary consumer price index for October that came out yesterday came in just as expected at 0.1%, which is an improvement from last reporting period’s -0.4%. Despite the improvement, inflation is still low and far from the ECB’s target.

The economic report to watch out today from euro zone is the German unemployment change report at 8:55 am GMT. The report, which measures the monthly net change in the number of people who are unemployed, is predicted to print worsen to 17,000 in September from -12,000 in August. Take note, however, that the report has been coming out consistently with better-than-expected numbers in the last six months so we could see another upside surprise l after, especially since the global economy is starting to recover.

[ForexGump]

Buyers finally came back to play yesterday, as the risk appetite was boosted by the better than expected GDP data from the US. The EUR benefited from this, with the EURUSD pair closing at 1.4822.

Germany got some nice news yesterday, as the unemployment rate fell to 7.7% this October. This was down from the 8.0% figure in September and marked the 2nd straight month that the rate fell. As a result, there was an increase of 26,000, as opposed to the expected 17,000 job losses. The question is, is this pick up genuine, or merely a result of government stimulus?

ECB member Axel Weber said that the central bank may begin its exit strategies by scaling back on long term loans to banks. He said that with more and more signs of recovery, central banks should start thinking about withdrawal of economic stimulus. Weber also said that it was possible that withdrawal of such measures would come before any rate hikes as the ECB will be waiting for price stability (inflation) to hit their target levels before increasing interest rates.

Later today, we get more data coming out from Germany as the retail sales report will be available at 7:00 am GMT. Retail sales are expected to have increased by 0.7% in the month of September. Take note that the previous month’s figure was revised down to show a 2.4% decline.

Also, at 10:00 am GMT, the CPI y/y report and Euro zone unemployment data will be on deck. The CPI report is expected to show that inflation has slightly improved in the past month to show just a 0.1% decline in prices from a year ago. The previous month had printed that consumer prices fell by 0.3% from levels a year prior. Euro zone unemployment is expected to rise to 9.7%, but given the uptick in employment in Germany, could we be in for a nice surprise today?