Daily Economic Commentary: Euro zone

[ForexGump]

It was a heck of a ride for the EUR yesterday as it traversed through peaks and valleys. I�d have a heart attack if I was an unprepared intraday position player. It opened strong against the USD and the JPY until it hit a wall during the early part of the Asia session. It then went south only to reverse once again during the US session. It likewise tuned in tough versus its European counterparts until it faltered when the opening bell in Wall Street was rung.

In a speech made by ECB President Jean-Claude Trichet yesterday, he said that it may take awhile for the ECB�s monetary easing programs to render into bank lending. He reminded the banks about their responsibilities to lend to firms and other consumers. He also noted that the ECB's recently announced quantitative easing program would give a hand in untying the Euro zone�s current financial knot. So far, the ECB had only purchased about �66 million from the total �60 billion plan in covered bond purchases.

Meanwhile, Meredith Whitney, the founder of Meredith Whitney Advisory Group LLC, had recommended a buy rating for the shares of Goldman Sachs. She has not advised so since January 2008. Goldman Sachs is due to report its second-quarter earnings results tomorrow. According to her, the firm is going to post some huge revenue due to its fixed-income, currencies and commodities business. The entire US stock market, led by the financials, was buoyed by her endorsement. Risk aversion sprouted following her statement which also supported higher yielding assets such as the EUR.

Today (9:00 am GMT), both the German and the Euro zone ZEW economic sentiment survey for the month of July will be issued. Both the accounts are expected to increase (German: 44.8 to 48.0, Euro zone: 42.7 to 44.2).

Data on Euro zone�s industrial production in May will also be announced at 9:00 am GMT. The account is expected to post a 1.5% gain after falling by 1.9% in April.

Today�s positive results may give a little boost to the EUR.

[ForexGump]

The euro zoomed to new highs yesterday, as the EURUSD and EURJPY pairs broke past key resistance areas as risk tolerance continued to dominate the market. US earnings data has helped spark risk appetite, which has helped the euro overcome poor underlying fundamental weakness. The EURUSD and EURJPY tested highs at 1.4120 and 133.40. Are buyers done? Or will the euro continue its hot streak?

Inflation data was made available from the Euro-zone yesterday, as the CPI y/y report was released. The report showed that from a year ago, consumer prices have fallen by 0.1%. This was the first time ever that the Euro-zone has encountered negative inflation... and yet the markets didn�t reach much to it. The drop in consumer prices has been led by the steep decline in oil prices. Core CPI (which doesn�t include energy, food, tobacco and alcohol) was at 1.4%, which is still less than the 2% target of the ECB. The ECB has been expressing some fears that the Euro-zone could enter deflationary circumstances � could this recent news signal the beginning of negative inflation?

Not much high impacts news for the rest of the week, as only the French CPI m/m (6:45 am GMT today) and Euro-zone Trade Balance (9:00 am GMT Friday) are due. With not much news coming out, we may see sentiment continue to drive the market.

[ForexGump]

The EUR/USD reached the area above the 1.4100 mark and stayed there for an entire day. The EUR failed to stage a strong rally against the USD despite the rise in risk appetite yesterday. Weak fundamental data from the Euro-zone was pinpointed as the culprit.

Price levels in France failed to rise as much as expected, with CPI up by only 0.1%. This is below the forecast of a 0.3% increase. Despite this, analysts reassured that this does not necessarily imply that deflationary pressures have increased.

In another part of the Euro-zone... Trade balance data in Italy improved as it crossed over from a 0.25 billion EUR deficit to a 1.19 billion EUR surplus. This report, however, had minimal impact on the EUR, which was unable to make further headway past the 1.4100 handle.

Euro-zone trade balance data is due at 9:00 am GMT today. The region's 0.3 billion EUR deficit is expected to turn into a 1.2 billion EUR surplus. If the actual figure disappoints, we might find the EUR/USD stuck in the 1.4100 area or it could head even lower. Further increases in risk appetite, a possible result of US earnings reports, could give the EUR the boost it needs.

[ForexGump]

The EUR looked strong as it blasted its way on top of most of the other key currencies in last week�s trading. Risk tolerance continued to feed the EUR�s might for the most part of the week. Its only �kryptonite� came in the form of the CAD. Trading of the EUR/CAD last week can only be described in one way� a bloody (red) long candle.

Euro zone�s trade balance for the month of May only expanded to �0.8 billion from �0.7 billion. The figure was expected to reach the �1.0 billion mark. Trade balance measures the difference between the Euro zone�s exports over its imports. A positive trade balance or a trade surplus means that the total value of exports exceeds that of its imports. Underlying the recent data was a 24% decline in exports from a year earlier. Imports, however, made a sharper drop of 27%. Both picture a weak trade environment between the Euro zone and its partners.

The German PPI in June will be released today at 6:00 am GMT. The index is projected to have increased by 0.5% during the period after registering a flat reading in May. The PPI is a good indicators of inflation since any increase in input prices are usually transferred to consumers. Note that the ECB�s inflation target is pegged just below 2%. The Euro zone�s latest CPI figure fell to an annual pace of -0.1% for the second consecutive month in a row. Hence, any increase in PPI figures would definitely be positive for the Euro zone�s economy and be bullish for the EUR at least in the short term.

[ForexGump]

While other major currencies staged a nice rally versus the USD yesterday, the EUR was weighed down heavily its poor economic data results. Even with increased risk tolerance, the EUR would probably find it hard to make significant headway above the 1.4000 mark versus the USD.

For one thing, the German ZEW economic sentiment survey for July was totally off target. It printed 39.5, which was almost ten points lower than forecast. It seems that investors and analysts have taken a step back from their previous optimistic stance and are starting to realize that their previous forecast was a bit premature. Experts say that they are expecting more disappointing ZEW survey results over the next few months. The report on euro zone industrial production also shared the same depressing tune. Apparently, industrial production for May rose only 0.5% and not 1.5% like initially expected.

For today, euro zone�s consumer price index is due 9 pm. The CPI has been steadily showing declining results month-on-month since July 2008. Contrary to consumer belief, lower prices do not necessarily point to a better economy. If the CPI starts hitting negative levels, the euro zone may enter a condition called a deflationary spiral. A deflationary spiral is a vicious cycle wherein the decrease in prices pushes production lower. This, in turn, forces businesses to lower wages and cut back on their work force. This puts less money in consumers� pockets leading to a decline in demand for goods and services. Rinse and repeat. The consensus for the June CPI is a 0.1% decline. We�ll have to wait and see if the forecast holds!

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[PipDiddy]

Relatively quiet Monday on the European front yesterday, as traders kept EUR pairs in check yesterday. The EURUSD bounced between a tight range of about 70 pips for most of the day. Could yesterday’s consolidation lead to a breakout today?

The EUR probably lost its cool from Monday’s trading session as the German and euro zone ZEW Economic Sentiment indexes came in worse than expected. The German edition showed that investor confidence fell more than expected this November, printing a reading of 51.1, down from October’s score of 56.0, while the euro zone version fell from 56.9 to 51.8.

The reports showed that investors felt that ending government stimulus coupled with high employment lowered growth expectations. This indicates that they probably feel that while there will be growth next year, it will rise at a steady pace.

Take note that this data was collected before the release of the G20 meeting this past weekend. Remember, G20 nations decided that they would take their time in implementing exit strategies for their economic stimulus plans. Will this alter investors’ mindset and could we see an uptick in next month’s release? Or are traders actually coming down to earth, after this very bullish run the past 6 months?

We could be in for another day of ranging today, as no economic reports will be released today. Be wary however, that ECB member Axel Weber will be delivering a speech today at 5:00 pm GMT. In the past, Mr. Weber has slipped up and dropped comments regarding monetary policy that the ECB had wished to keep under wraps. So, be on the lookout for any “mistakes” that could happen during his talk.

[PipDiddy]

Hawkish comments from ECB officials buoyed the EURUSD above the 1.5000 mark. As the pair inched close to its yearly high, it fell sharply as the USD rallied on investors' profit-taking.

ECB member Axel Weber highlighted the improved outlook for the euro zone economy. Although he says that its still too early to withdraw the ECB's easing programs, the central bank must also be careful not to miss the right time for exit. Meanwhile, Nout Wellink, another ECB official, noted signs of stabilization in the Dutch economy, hinting that excess liquidity will be mopped up soon.

We'll see whether these upbeat remarks about the euro zone's economy are echoed in the actual economic figures. Euro zone is set to report its industrial production data at 10:00 am GMT today. After posting a 0.9% increase in August, industrial production is projected to be up by 0.6% in September. If the actual reading beats the consensus, then the EURUSD might find itself back above the 1.5000 handle.

Later on, ECB President Jean-Claude Trichet is set to give a speech entitled "The Transatlantic Marketplace: Challenges and Opportunities Beyond 2009" at 7:00 pm GMT. Would he talk about the timing of future rate hikes? Better stay tuned!

[PipDiddy]

In a single day the EURUSD erased most of its gains that it had for the week. The fiber fell to low of 1.4821 before closing at 1.4840 in yesterday’s price action.

The ECB’s monthly bulletin was published yesterday. Here, the ECB noted that the euro zone’s economy is seen to improve during the second half of this year. The ECB said that improvements will be gradual. It, however, remained its cautious stance by stating that the euro zone’s economic outlook is still subject to uncertainties.

Meanwhile, euro zone’s industrial production rose by 0.3% in September which is its fifth consecutive monthly gain as the demand for steel, machineries, and the like increased with a recovering global economy. During the same period, production of capital goods such as equipments advanced by 1.7%.

In spite of these ‘positive’ reports, the EUR still dropped against the USD.

The euro zone will take center stage today with the release of Germany’s and the euro zone’s third quarter GDP reports at 7:00 am GMT and 9:00 am GMT, respectively. Germany carries a lot of weight in the euro zone’s economy since it makes up about a third of its output. With Germany’s economy expected to have expanded again by 0.8% after posting a 0.3% growth during the second quarter, it might just be enough to pull the euro zone out of recession. The euro zone is seen to have logged a positive growth for the first time since the second quarter of 2008 with its GDP anticipated to have grown by 0.6% after contracting by 0.2% in the previous quarter. GDP is a broad measure of economic growth. Hence, any increase in this account could reflect positively on the EUR as well.

Professor Forex Gump wrote an article about the upcoming GDP releases. Check it out by clicking on this link: Third Quarter's The Charm for Euro Zone?

[PipDiddy]

Third time was indeed the charm for euro zone as its GDP report last Friday showed expansion. According to the report, euro zone’s economy expanded 0.4% during the third quarter of 2009 after contracting 0.2% between April and July.

Although the expansion posted was slower than expected, the results eventually proved to be beneficial for the euro as it managed to gain back some of its losses versus the dollar when the US session went rolling along. Digging deeper into the report would reveal that the surge in German and French exports was able to make up for weak consumer spending.

Euro zone’s economic cupboard is relatively light this week as only a bunch of medium-impact economic reports are due.

Today, expect to see the consumer price index at 10:00 am GMT. The prediction is that the average price level of goods and services fell in October by 0.1% after falling by the same percentage in September. However, the core report which excludes the prices of energy, food and other volatile items in its computation is expected to show a rise of 1.2%.

On Wednesday, the euro zone’s current account balance will be released at 9:00 am GMT. The estimate is that the current account balance report would show a €600 million surplus in October, up the €1.3 billion deficit seen the month prior.

Lastly, on Friday, the German producer price index is due at 7:00 am GMT. The report, which measures the monthly change in price of wares sold by manufacturers, would probably show that prices in October increased 0.1%.