Daily Economic Commentary: Euro zone

Better the expected economic data managed to push the EURUSD back higher during the European session after falling sharply during the Asian session last Friday. It seems that heightened risk tolerance continues to hold the EURUSD pair above the 1.4100 handle.

It all began at 3 pm GMT, when nation specific purchasing managers� index (PMI) started coming out. First up was the French flash manufacturing PMI. It came out at 47.9, an improvement from the 46.6 consensus. The German manufacturing PMI also showed signs that confidence was starting to come back to businesses It rose to an 11-month high at 45.2. Economists were only anticipating a reading of 42.1. The PMI assesses the general outlook of businesses engaged in the manufacturing by using a 0-100 scale. A reading above 50 means that the manufacturing industry is expanding. Even if results on the PMI last Friday were all lower than 50, the underlying trend is upwards, indicating that the recession�s grip on euro zone�s economy is slightly easing.

The German Ifo business climate report for July, which measures the general sentiment of German manufacturers, builders, wholesalers and retailers toward the economy, also exacerbated EUR gains. It climbed the fourth consecutive time, printing 87.3, better than the 86.6 initially expected.

Looking ahead, euro zone�s economic slate is relatively light. In any case, the Gfk German consumer climate report for July, which surveys consumers on their overall sentiment towards the economy, is due later at 6 am GMT. It is predicted to print 2.9, same as last reporting period�s reading. Following at 8 am GMT is euro zone�s June M3 money supply. The total quantity of currency probably rose by 3.6%, economists said. As for EUR price action, unless risk tolerance surprises once again, we might see the currency continue its range bound motion for today and for the rest of the week.

The euro continued to make some gains, as the EURUSD and EURJPY pairs closed slightly higher at 1.4239 and 134.53. The euro has been gaining some headway, albeit at a much slower pace than a couple weeks ago. Can the euro shift into a higher gear and make new highs? Or will sellers make a move and gain momentum?

It looks like German consumers are more optimistic, as the Gfk German Consumer Confidence report showed a slight improvement in the score of their index. The sentiment index had a reading of 3.5 for August, up from July�s score of 3. This was also higher than the anticipated score of 2.9.

The M3 money supply level for this past June was also released yesterday. The report showed that the annualized growth rate of M3 money supply � which measures the amount of currency in circulation and in banks - slowed down to 3.5%, down from the 3.7% level of the preceding month. Money supply has been growing at a slower pace the past couple of months � could this dampen spending and investment? If things don�t start improving drastically, could we see an expansion of quantitative easing measures to help increase money supply, which in turn should lead to more spending?

No economic reports coming out today. Tomorrow, Germany�s preliminary CPI m/m report is due. The report is expected to show that consumer prices only rose by 0.2% in July. If this figure comes in to show a negative figure, could this spark deflation fears once again?

The EUR/USD started the day with an ascent towards the 1.4300 handle but found itself tumbling down after weak earnings reports and a disappointing consumer confidence reading from the US triggered a risk aversion comeback. No major economic reports were released from the Euro-zone yesterday.

Does the EUR have a chance to recover some of its losses today? Only the German preliminary CPI, which is projected to be up by 0.2%, is on the docket. Price levels in Germany were up by 0.4% in the previous month. Since this report is not usually high-impact, price action in EUR pairs may once again be vulnerable to changes in risk sentiment.

The EUR lost its taste against the JPY and the USD for the second day in a row as tentativeness in the capitals markets, particularly in the US, persisted. The EUR got slaughtered also by the CAD and the GBP. It was only able to hold its ground versus the CHF.

The German flash CPI for the month of July unexpectedly fell by 0.1% after rising by 0.4%. The index was expected to gain by 0.2%. This translates to an annual drop of 0.6% in Germany, the Euro zone�s largest economy. This also marks its first annual decline in 22 years which puts a lot of downward pressure on the entire Euro zone�s consumer prices. However, some economists believe that the recent drop is just temporary and that general prices are poised to rise again given the recent increase in energy prices and the improvements in the other parts of the economy.

In the US, durable goods orders for the month of June slid by 2.5% against expectations for only a 0.6% drop. The account rose by 1.3% in May. Market participants switched back to the safety of the USD and JPY away from higher yielding assets like the EUR following the release.

Today, the German unemployment change for the month of July will be reported at 7:55 am GMT. The change in the number of unemployed people during the period is expected to climb to 44,000 from 31,000. Such increase in unemployment could weigh down on the EUR.

Better than expected news out of Euro zone helped the EUR move up a bit across the boards yesterday. Looking at the EUR�s price right now versus the USD, the currency certainly still has a long way to go before regaining the amount of ground it lost a few days back.

Germany�s unemployment change, which records the change in number of jobless people per month, printed -6000, completely opposite the 44,000 initially predicted. This means that the number of jobless people actually became less in June! The June report on consumer confidence also sang the same positive tune. It showed a reading of -23, higher than the forecast and an improvement from last June�s -25.

Actually, looking at the headline results, these are strong numbers (special mention to the German unemployment change). Despite this, the EUR refused to make significant headway, indicating that euro zone�s underlying fundamental weakness is really weighing heavily on the currency. Euro zone’s economic health is still fragile at the moment and this makes investors particularly cautious buying up its domestic currency.

On today�s economic slate, we�ve got the consumer price index flash estimate year-on-year for July and euro zone�s unemployment rate for June at 9 am GMT. The CPI is expected to show that average prices fell by 0.4%, worse than June�s 0.1% rise. The unemployment rate is also predicted to worsen to 9.7% from 9.5%.

Oh, and be careful of event risk today as the US advance GDP is due for release! No trader wants to get caught with their pants down… or so I believe… Other than that, have a nice weekend!

The euro made a last minute sprint to the finish line, finishing strongly against the dollar to end the week. The EURUSD pair had been trading lower over the week as the dollar gained on some runs of risk aversion during the week. However, the pair closed slightly higher to end the week, closing at 1.4252, as better than expected US GDP data helped boost risk appetite late on Friday trading session.

The euro-zone got some more deflation scares as a CPI report indicated that consumer prices have fallen by 0.6% from a year ago. This was worse than economists� forecasts of a 0.4% decline. ECB President Jean-Claude Trichet has said that he expects inflation to continue to be negative for the meantime, before turning back positive by the end of the year.

Unemployment data was also available on Friday, which showed that the unemployment rate has risen to 9.4% through the month of June. This was slightly better than the estimate of a rise to 9.7%, but it is still at its highest level in almost 10 years.

Coming up on the economic report menu for today is the German retail sales data, which will be available at 6:00 am GMT. Sales are expected to have increased by 0.4% in June, after they fell by 1.4% the previous month. Tomorrow, the Producer Price Index is due at 9:00 am GMT. Prices are forecasted to have risen by 0.2% in June.

Later this week, the ECB will be making its interest rate decision. Given the recent developments of consumer prices, could we be in line for any surprises? Take note that the IMF has said that the ECB should maintain an �accommodative stance� if signs continue to point towards deflation. The ECB�s rate currently stands at 1.0%, so they do have some room to cut rates further. Furthermore, their quantitative easing plans are nowhere near the levels of that of the UK or the US. Could the recent data expressing underlying weakness make ECB members become more aggressive in terms of monetary policy?

The EUR went for a strong finish yesterday, with the EUR/USD racing past the 1.4400 mark and the EUR/JPY reaching the 137.00 area. Although the German retail sales report was a major disappointment, the EUR mustered the courage to rally on account of risk tolerance among investors.

Retail sales in Germany posted a 1.8% decline as the nation continues to claw through its worst economic downturn since World War II. Analysts expected a 0.4% increase after retail sales recorded a 1.3% decline in the previous month. However, the EUR was shielded from further losses as the final manufacturing PMI for overall Euro-zone rose from 46.0 to 46.3.

The EUR continued to make headway as upbeat economic reports from the US were released. The improvement in ISM manufacturing PMI paved the way for risk appetite as the EUR surged above the psychologically significant 1.4300 and 1.4400 handles.

Only the Euro-zone PPI is due today. This report, which will be released at 9:00 am GMT, is expected to have a minimal impact on the EUR price action. Producer prices are projected to be up by 0.2% in June after seeing a 0.2% drop in May. Just like yesterday, the EUR stands to benefit if risk tolerance stays another day in the currency market. Note that today’s economic schedule for the US, which comprise consumer spending and housing industry data, are expecting improvements.

The EUR took a breather as it closed on the short side of USD and JPY in yesterday�s trading after climbing sharply for three days. The EUR/JPY and the EUR/USD pairs are currently encountering some resistances at their respective previous month�s high. Will the EUR be able to find a can of spinach and move forward or will it wilt?

The Euro zone�s year-over-year PPI fell in line with expectations by 6.6% after already dropping by 5.9% in the month prior. The drop in the input prices can be attributed to the decline in oil prices and the pressure given to the producers to charge at a minimum.

The EUR fell mostly during the Euro zone�s trading session.

In the US, pending home sales surprisingly jumped by 3.6% after previously rising by 0.8%. The consensus was only for a 0.6% gain. The EUR gained as investors once again turned on their �risk appetite mode� following the release. The EUR was able to recover part of its losses shortly.

Euro zone�s retail sales for the month of June will be released today at 9:00 am GMT. Sales are expected to have risen by 0.3% after falling by 0.4% in May. Any increase in the figure can reflect positively on the Euro zone�s economy and could give support on the EUR at least on the short term. However, Germany recently showed a decline in its retail sales covering the same period by 1.8%. Note that Germany comprises about a third of the Euro zone�s economy. Hence, it is very possible that we see a surprise downside in the upcoming data release. Such could then be bearish for the EUR.

Despite yesterday�s mixed economic data, the EUR swam side wards against the USD and JPY. It seems that buyers and sellers have lost steam and are now just currently resting from Monday�s strong move. Will the European Central Bank�s interest rate decision today provide fuel for investors and cause the EUR to break out of its consolidation?

Euro zone retail sales released yesterday showed that consumer demand still remains suppressed by the global economic downturn. It printed a 0.2% fall in sales in June, opposite the 0.3% gain in sales anticipated. The Final services purchasing managers� index was revised only slightly to 45.7 from 45.6. The impact on the market of both releases was hardly felt.

First up on euro zone�s economic calendar today is Germany�s factory orders June-on-May. The report has limited impact simply because the actual results have the tendency to vary significantly from the initial forecast. In any case, the forecast currently stands at 0.6%, lower than last reporting period�s 4.4%.

The European Central Bank�s interest rate decision is also on the news wire today at 11:45 am GMT so expect a bit of consolidation (as if the pair hasn�t been ranging enough) prior the release. Economists are saying that the bank would on its hands for the fourth straight time and keep rates steady at 1%. In July�s policy meeting, the bank reiterated to the public that economic activity in the 16-nation zone has been weak but the pace of deterioration has slowed down. Despite this, positive data have been popping out here and there so President Jean-Claude Trichet of the ECB would probably echo the same assessment in today�s interest rate announcement.

The EURUSD once again traded in a relatively tight range, although it did close much lower, closing the trading day at 1.4356. I found the relatively little movement somewhat surprising, as the European Central Bank did release their interest rate decision and latest statement.

As expected, the ECB kept their base rate at 1.00%. The recent run of good economic data has given reason for the ECB not to cut rates further. In addition, the ECB did not announce any expansion of their bond purchase program. Take note that they have only spent 1/8th of the allocated amount for bond purchases, so they do have more room to operate if they choose to do so.

However, ECB is notorious for being tight handed and will probably only implement further stimulus if there is no choice. I�m not surprised � after all, their main goal is price stability (meaning an inflation rate of 2%) and further rate cuts and quantitative easing would pose more threats to that. Aside from that, the ECB President Jean Claude Trichet’s statements were very similar to that of the previous month�s release � that the economy was starting to bottom out as there are signs of recovery, but the ECB will continue to asses its bond purchase and credit lending programs.

Also released yesterday was the German factory orders report, which showed that orders rose by 4.5% from May to June. This represented the highest rise in over 2 years. Government officials are now saying that their forecast for an economic contraction of 6% may be too pessimistic.

Not much high impact news coming out today, with only the German Industrial Production m/m report of any significance. Forecasts are for a 0.6% from May to June.

I expect traders will be waiting for the Non-Farm Payrolls report from the US later at 12:30 pm GMT. Check out my thoughts on this matter in my blog. We started the week with a bang � could the week end with another one? Watch out for any volatility spikes and good luck trading!

Were you able to catch the fireworks last Friday? Word on the street is that the EUR/USD got burned! This pair was badly injured as it lost almost 300 pips after the US NFP data came out.

The NFP report showed that job losses are moderating and that a recovery in the US labor market is in the works. After a total of 247K in job cuts were reported, the EUR/USD rallied past the 1.4400 area. Soon after, it tore down one support level after another and fell to a low of 1.4154. US employment data was actually better than expected since it came below expectations of 320K in job losses. This should have set off a run of risk grabbing by investors, which should have boosted the EUR. But the opposite scenario took place and this suggests that there could be something fishy going on…

Fundamentals in the Eurozone have been strong, adding further reason for a EUR rally. German trade and current account surplus grew in June while manufacturing PMI picked up pace in July. Some speculate that the neutral stance of the ECB does not hold a candle to the possibly very bullish outlook of the FOMC. Market players could be pricing in rate hikes by the Fed, which is set to deliver its statement on Wednesday. More EUR selling perhaps?

A massive EUR selloff could be in the cards if Euro-zone’s second quarter GDP disappoints. This report, which is due on Thursday, could post a 0.5% contraction in economic activity. Although this is better than the previous quarter’s 2.5% contraction, it would mark the fifth straight month in negative GDP. If GDP falls by less than 0.5%, then the odds could shift in favor of the EUR.

In the meantime, other economic reports in the line-up include industrial production figures and CPI data. For today, France is set to report a downturn in industrial production. Analysts project a 0.1% decline will follow last month’s 2.6% uptick in industrial production. The actual figure is due at 6:45 am GMT. Later on, Sentix investor confidence will be released at 8:30 am GMT. The index is expected to climb from -31.3 to -26.0. Although the index still lingers in negative territory, this would be a notable improvement. If investor confidence rises more than anticipated, then the EUR could recover some of its losses from last week.

It was the revenge of the fallen for the USD and JPY as they both rose strongly against the EUR in yesterday�s trading. Market participants have been favoring the likes of the EUR over the relatively safer USD and JPY as risk appetite in the capitals markets increase. This trend, however, was snapped last Friday as investors suddenly bought up the USD despite the improvements in the markets. Will this continue or was it just an isolated case?

Fundamentally, the French industrial production for the month of June rose advanced by 0.3% against expectations for a 0.1% decline. The account gained by 2.8% during the month prior. The recent gains industrial production was perhaps due to a reduction in inventories and the government�s �cash for bunkers� program in which they pay �1,000 for buyers who trade in cars that are at least 10 years old.

However, growth in output can only be sustained with continuous demand. France is one of the major economics that make up the euro zone. Any advance in production, thus, reflects well in the euro zone�s economy and the EUR at least in the short term.

Euro zone�s Sentix investor confidence index was also released. The index came in at well above expectations at -17.0. It was only projected to improve to -26.0 from -31.3. The account surveys about 2,800 investors and analysts about the relative 6-month economic outlook for the Euro zone. A reading above 0.0 indicates optimism while a negative score means pessimism. While the latest mark still remains negative, the better-than-expected result suggests that investors are beginning to see the light at the end of the tunnel.

No top tier economic reports are due today in the Euro zone. The EUR would most likely move in reaction to the investors� sentiment on the USD. Whether the USD will go with risk aversion or fundamentals will remain to be seen.

The big dog of all currency pairs, the EURUSD, was quite a bore yesterday as it just drifted in a tighter than usual 75 pip range. The lack of any meaningful economic data also was a prime factor in keeping any volatility at bay. With the FOMC interest rate decision and euro-zone preliminary GDP coming up, we may see the pair continue its sideways pattern.

In any case, Germany�s final consumer price index was revised to show that prices remained flat July-on-June, an improvement from the -0.1% preliminary release. On the other hand, the wholesale price index reported a 0.5% decrease, opposite that 0.1% rise initially expected. If poor inflation numbers continue to print, all these euro zone deflation fears could soon become a reality.

Later, expect to see the June report on euro zone industrial production at 9 am GMT. The forecast for June is a 0.3% gain. Industrial production seems to be picking up as last reporting period�s report showed an increase of 0.5%. This was quite an improvement because this was the first positive figure since November 2008.

The euro strikes back! The euro gained against the dollar, as the USD slid right before the release of the FOMC statement. As expected, we saw major volatility upon the release of the statement. Initially, it looked like sellers were dominating as the EURUSD pair dropped, but buyers pushed the pair right back up. The pair was able to avoid giving up its winning, ending the day at 1.4212.

Not much high impact news was released yesterday, with only the French CPI and euro zone industrial production data released. French CPI showed a decrease in consumer prices of 0.4% in the past month, which was in line with expectations, while industrial production fell by 0.6% in June. It was expected that production would rise by 0.3%. Traders didn�t seem to react however � they were probably sitting on the sidelines and waiting for the news coming out from the US session.

Today, I suspect we could see more volatility in the markets, especially with 2nd quarter GDP data being released at 9:00 am GMT. Euro zone GDP is forecasted to have contracted by 0.5% in the past quarter. Be wary that the German and French GDP reports come out a few hours earlier, so those may reflect what the euro zone GDP figure will be.

Also, the European Central Bank’s monthly bulletin will be available at 8:00 am GMT. This may give more insight into how the ECB feels about the current state of the economy.

Tomorrow, more inflation data coming out at 9:00 am GMT. The CPI report is expected to show negative inflation of 0.6% from a year ago. If this figures comes out worse than expected, could we see deflation fears spark once again?

Hooray for France and Germany! Both nations have officially exited the recession as both reported 0.3% GDP growth for the second quarter. The entire euro zone was not as lucky when it recorded a 0.1% contraction for the same period. This better-than-expected reading indicated that the region came so close to climbing out of the recession but, well, better luck next time.

The EUR made significant headway against the USD as traders adopted a bullish outlook for the euro zone’s economy. Recall that the IMF projected that the region would continue contracting until 2010 but the reported growth in two of its largest economies suggest that an economic recovery would come sooner than expected. Although economic growth in the euro zone still lingers in negative territory, the 0.1% downturn is a significant improvement over the first quarter’s 2.5% contraction. The question is whether France and Germany can sustain the growth in their respective economies and eventually buoy the entire euro zone into positive growth as well.

Up ahead, we’re looking at French non-farm payrolls report at 6:45 am GMT today. A 0.7% decline in employment is expected. Euro zone’s CPI figures are also on today’s docket at 9:00 am GMT. Price levels are projected to be down by an annually adjusted 0.6% in July. Meanwhile, core CPI is predicted to be up by 1.4%. Europe is known to be under the threat of deflation and worse-than-expected inflation data could raise doubts about an economic recovery in the region and cause the EUR to return its gains.

The EUR capped last week on a disappointing note as it closed negatively versus most of the other majors. During the week, it broke its intermediate (1 month) uptrend line and a significant psychological support at 135.00 against the JPY. Will the EUR move lower from then on? Technically it is probable.

Deflation has been the Euro zone�s main concern lately and with Friday�s results it seems that things are getting dimmer. Euro zone�s headline CPI has worsen to -0.7% from -0.6%. Its core CPI also slowed to 1.3% from 1.4%. The average prices in the Euro dropped because of lower energy costs and higher unemployment. The rise in unemployment caused consumers to keep their money in their pocket rather than spend. Given the weakening labor market, there will be continued downward pressure on the general prices.

Today (9:00 am GMT), the euro zone�s trade balance for the month of June will be released. The account is expected to have improved to �1.4 billion from �0.8 billion.

The German and euro zone Zew economic sentiment surveys are also due tomorrow (August 18) at 9:00 GMT. Germany�s index is seen to rise to 45.2 from 39.5 while euro zone�s account is expected to improve to 44.6 from 39.5 as well.

Any increase in the mentioned accounts could give a much needed support to the EUR.

The euro got another serious beating from the dollar yesterday as poor risk tolerance was further aggravated by the strong sell-off in Chinese equities. Chinese equities took on another 5% loss after falling for already two weeks now. It seems that euro sellers have their eyes set at 1.4000 (and maybe a little further off, the 1.3750 area).

Euro zone�s trade balance that came out yesterday was a little bit rosier though. It showed that its external trade balance for June rose by a whopping 4.6 billion euro in June compared to the 0 billion euro exactly one year prior. It is also an improvement from May by 2.1 billion, indicating that the global export industry is starting to pick up.

For today, the German ZEW Economic Sentiment survey for August will be on focus. The survey asks investors and analysts how optimistic (or pessimistic) they are on their outlook on the economy using a negative/positive scale. A reading above base line zero means they have an optimistic outlook. It will be released at 9 am GMT and is predicted to print a reading of 44.6, a considerable improvement from last month�s 39.5. The survey tends to have a significant impact on risk so a better-than-consensus figure could provide some minor support for the falling value of the euro.

The euro held off against the dollar yesterday, as it avoided another beating and actually winning the round. The Euro advanced against the dollar, as the EURUSD pair closed higher at 1.4129. Can the euro sustain its momentum today?

La vie c�est bien! Life is good (or at least getting better) according to the latest ZEW Economic Sentiment reports. The reports showed that investor confidence is rising in both Germany and the Euro zone as a whole, as both reports posted better than expected readings. The German edition scored a 56.1, while the Euro zone had a reading of 54.9. The forecasted scores were 45.2 and 44.6 respectively. This comes on the heels of GDP data that was released last week, which indicated that Germany is now out of a recession. Investors are also more optimistic as exports and industrial orders have picked up the past couple of months. Still, some economists want to remain cautious and wait for more signs of a sustained recovery.

For today, we have the German PPI m/m report, due at 6:00 am GMT, and the current account at 8:00 am GMT. Producer prices are expected to have fallen by 0.1% in July, while the current account is expected to show a deficit of �1.7 billion. With trade picking up recently, could we see a surprise from this report?

After slowly warming up for almost half a day, the EUR/USD sprinted past the 1.4200 mark just before the final bell tolled. But why the rally even when Germany saw its worst PPI in 60 years?

It looks like the ECB should reconsider its belief that deflation threats to the euro zone are minimal. Germany announced a 1.5% drop in producer prices which was notably worse than the consensus of another 0.1% decline. Similar figures have been reported all over the euro zone, reinforcing the possibility of deflation. The problem with deflation is that it counteracts some of the impact of easing policies by making the real rate of interest higher than it actually is. One way to combat this effect of deflation is to implement more easing policies, which I don’t think the ECB is ready to do.

Also released yesterday was the euro zone’s current account balance. The deficit widened from 0.1 billion EUR to a whopping 5.3 billion EUR! Despite these unfavorable reports, higher-yielding currencies such as the EUR rebounded yesterday after tumbling down on account of China’s equity slide. The rally was led by a strong rise in crude oil prices, which managed to keep risk aversion at bay. Risk tolerance surged especially after the IMF announced the end of the global recession yesterday. Demand for higher-yielding assets received another boost when a Goldman Sachs economist claimed that the US has officially emerged from the recessionary territory.

Would these rallies be sustained today? No economic reports are due from the euro zone, which implies that the rising investor confidence could spill over until today.

The EUR was pretty much moving on a flat line throughout the day due to lack of economic catalyst in the euro zone. It was only able make a last hurrah when risk appetite sparked once again during the US session.

After sleeping for the most part of yesterday, the EUR gained against the USD and the JPY during the US session. The surprise increase in the Philadelphia Fed index (4.2 versus -1.9) plus the fourth consecutive monthly rise of the CB leading index induced investors to take in more risks. Currencies like the EUR benefited as a result.

Today (7:30 am GMT), services and manufacturing PMIs are due for France, Germany, and the euro zone. All accounts are expected to register gains, however, they are not seen to supass the grade of 50.00. Nonetheless, they are closely inching towards it already. Note that a reading above 50.0 indicates expansion in the sector.

The EUR might close the week right on the money given the positive expectations in the upcoming reports plus the possible run of risk appetite during the US session.