The Euro shot higher by 45 pips on the better than expected German ZEW release which saw investor sentiment turn positive for the first time in two years. The euro/dollar reached as high as 1.2991 building upon earlier gains derived from improved risk appetite.
[U][B]Talking Points[/B][/U][B]
• Japanese Yen: Found Support at 97.70
• Pound: CPI Lower But Core Prices Increase
• Euro: German ZEW Reaches Two Year High
• Canadian Dollar: BoC Rate Decision Ahead
• US Dollar: Dow Component Earnings In Focus [/B]
[B]Euro Finds Support As German Investor Sentiment Reaches Two Year High, But Will Weakness Resume?[/B]
The Euro shot higher by 45 pips on the better than expected German ZEW release which saw investor sentiment turn positive for the first time in two years. The euro/dollar reached as high as 1.2991 building upon earlier gains derived from improved risk appetite. The +13 reading jumped from last month’s -3.5 and far exceeded expectations of +2 as investors are starting to see positive developments pertaining to growth. All the news wasn’t positive as German producer prices falling by 0.7% in March dragged the annualized reading into negative territory for the first time in five years. The 0.5% decline will add to deflation concerns which could make the ECB’s decision on quantitative easing easier at their next policy meeting.
However, falling inflation is one of the reasons that investor confidence is improving as it is leading to increasing purchasing power by consumers. Increasing demand could lead companies to slow their pace of layoffs which could help bring a bottom to the current downturn. Additionally, credit conditions have deteriorated at a slower pace which is fueling hope that businesses and consumers will begin to gain access to needed funds. Therefore, this may be the opportune time for the central bank to step up their efforts in order to accelerate the pace of the recovery. Regardless further weakness appears to be in store for the single currency as technically it has broken below key support levels at the 61.8% Fibo level of 1.2456-1.3740 and the 50-Day SMA.
The pound rose through overnight trading despite U.K. CPI falling to 2.9% from 3.2% in March. It is the first time since in a year that inflation has been within the BoE’s 1%-3% target band. The central bank has maintained that prices at risk of undershooting their benchmark which led them to initiate quantitative easing measures. However, core prices unexpectedly rose to 1.7% from 1.6% as prices absent food and gasoline have started to stabilize. Apparel and household goods prices rose 1.1% and 2.0% respectively which could be a sign that demand is picking up which we may see in Friday’s retail sales figures. The BoE will be able to complete its current purchasing program and assess its results without considering further measures if prices continue to stabilize, which may become a supportive factor for sterling. The 100-Day SMA continues to hold as support at 1.4527 but if we see the pound/dollar break below the technical level then downside risks may increase.
After yesterday’s flight to safety sparked a dollar rally, we are seeing fears ease a bit as there are enough “green shoots” to give investors hope that a recovery is imminent. Therefore, we could see the greenback give back some of yesterdays gains today if risk appetite continues to increase. The earnings calendar may have something to say today regarding overall risk sentiment as five Dow components will report including United Technologies, Coca Cola, DuPont, Merck and Caterpillar. The biggest event risk from the North American session will be the upcoming Bank of Canada rate decision where the central bank is expected to lower their benchmark rate by 50 bps to 0.50%. Traders are also expecting that the committee will announce quantitative easing measures which could lead to further “loonie” weakness. However, most of the move may already be priced into the currency as we saw it lose over 300 pips against the dollar.
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Forex Trading Weekly Forecast - 04.20.09
[I]To discuss this report contact John Rivera Currency Analyst[/I]: [email protected]
