Euro Unmoved by German GDP All Eyes on US CPI

[B]- Japanese Yen: Machine Orders drop markedly

  • Euro: German GDP better, French worse
  • Pound: UK CPI softer echoing PPI data
  • US Dollar: CPI and TICS on tap[/B]

Euro Unmoved by German GDP All Eyes on US CPI
The stronger than expected German GDP data provided little help to the euro as the impressive numbers from EZ?s largest economy were offset by worse than projected results from France. German GDP printed at 0.5% vs. 0.3% consensus while the French figures came in at 0.5% vs. 0.7% anticipated. The German GDP results benefited from an increase in trade and investment, but were held back by lackluster consumer demand still hampered by the hike in VAT implemented at the start of 2007.
The German consumer remains key to the euro bullish case going forward. Unless and until Germans increase their spending further GDP growth may be quite problematic. Germany was able to maintain its growth momentum due to a very strong performing trade sector. However, with US economy in a clear slowdown and euro hovering near record highs against both the yen and the greenback additional upside surprises in trade will be very hard to achieve. Therefore, the next phase of Eurozone expansion will need to be driven by internal demand. If unemployment rates continue to decline and oil prices remain stable, chances are good that the world?s second largest economy will continue to expand at a better than 3% yearly pace. However, those euro longs counting on further hikes by the ECB beyond the 4% level may be sorely disappointed. Given the current economic performance in the 13 member region, EZ monetary policy makers are likely to stand down after raising rates in June, especially if inflationary pressures remain well contained below the central banks target of 2%.
Meanwhile inflation was the focus across the pond where UK CPI data echoed the softer PPI results from yesterday. Core readings printed at 1.8% slightly below the 1.9% expectation while the headline number dropped below the critical 3% barrier which last month forced the BoE chief Mervyn King to write a letter to Chancellor Brown explaining the central banks monetary outlook. The pound immediately dropped on the news as the possibility of a quick additional rate hike beyond the 25bp bump this month faded away. With the pound driven above the 2.0000 level by speculative flows that anticipated UK rates to increase to 5.75% by the summertime, the pound now faces serious resistance as traders reevaluate that super hawkish scenario. For the time being the unit is likely to consolidate and won?t challenge the 2.000 figure again unless US data deteriorates materially pushing the dollar lower across the board.

Finally, more disappointment out of Japan tonight as Machine Orders missed widely printing at -4.5% vs. 1.5% projected. The news reflects the vulnerability of Japan to slowdown in US consumption as manufactures around the globe curtail their demand. Furthermore, tonight?s weak report suggests that CAPEX - a key component of Japanese GDP growth may be a smaller contributor than the market expects. With tepid consumer demand and now a slowdown in investment expenditures, Japanese economic situation remains grim. Little wonder then that USDJPY crept above 120.50 in early London trade as carry traders showed no fear in plowing back into the pair. We however, urge caution. USDJPY trades more on risk aversion dynamics rather than Japanese fundamentals and if equity markets begin to correct , the latest rally in USDJPY will likely follow suit.