DailyFX analysts started souring on the Euro too early as the single currency rose by 700 pips against the dollar and yen to end May. The EUR/USD and EUR/JPY both set yearly highs during this period and have continued to trade higher.
A bickering ECB over the future of interest rates and quantitative easing measures generated questions on whether the central bank would be able to agree upon a strategy that would lift their economy pout of the current recession. There were already fears that policy makers where behind the curve is responding to the crisis which would lead to a prolonged recovery for the region. This outlook for the Euro came under question with the lack of direction and a 2.5% contraction in first quarter GDP. However, optimism began to rise as the global economy showed signs that the worst of the credit crisis had past and stability was returning. A jump in the German Zew survey to 31.1 from 13 underlined the building confidence which helped fuel risk appetite and ultimately the Euro continuing to trade higher. Rising equity markets and improving cyclical indicators such as the PMI composite rising to 43.9 from 41.1 also added to support for the single currency.
What Has Changed?[/B]
The ECB appeared united following its latest policy decision as they left their benchmark rate at the record low 1.00% and didn’t add to their commitment to purchase 60 billion euros in covered bonds. However, President Trichet following the rate decision and subsequent rhetoric from members has left the door open for further easing which could weigh on Euro sentiment. The latest ECB bulletin showed that the central bank doesn’t see a return to growth until mid 2010 which is being supported by recent fundamentals which includes German industrial production sharply falling by 1.9% in April, and unemployment in the Euro-zone rising to 9.2%. Despite these concerns, the Euro continues to trade higher as optimism remains strong evidence by the Sentix investor confidence indicator rising to -27.0 from -34.3. At this point the pair remains highly correlated to risk appetite which is evidenced in the chart below. Yet, it is becoming clear that the U.S. is on a faster pace of recovery which may start to reverse the sentiment for the EUR/USD. The unclear path of the euro is apparent with our analysts splitin their outlook for the EUR/USD.