ZEW Weaker But Euro Holds Ground - How Much Longer?

[B]Talking Points

• Japanese Yen: below 101.00 on equity flows
• Euro: ZEW stings but bargain hunters come in
• Pound: Cold CPI weak RICS all weigh
• US Dollar: PPI on tap [/B]

The ZEW survey of investor sentiment printed much worse than expected at -40.7 versus forecasts of -33.0 pushing EURUSD back towards the 1.5800 level in early Frankfurt trade, but the unit soon recouped most of its losses as bargain hunters swooped in. The single currency continues to trade on momentum and euro longs are loath to give up the fight before making another run at the psychologically important 1.6000 level.

Still the economic data from the EZ continues to suggest that the region is beginning to feel the impact of high exchange rates and slowing global growth. As ZEW demonstrated, European investors are becoming concerned about the profit margins, inflation and the impact on the consumer of higher food and energy costs. For now the currency market is refusing to acknowledge these problems in the EZ and is focused exclusively on the weakness in the US economy. However, if tonight’s poor showing in the ZEW serves as a precursor to a possible negative surprise in the more important IFO survey next week, then the EURUSD may find further upward progress to be far more challenging.

Meanwhile UK data continued to deliver nothing but bad news as RICS housing survey registered its worst reading since the survey began in 1978 and the BRC March retail sales recorded their worst performance since 2005. As a finishing touch on the night, UK core CPI data surprised to the downside printing 1.2% vs. 1.3% forecast negating the inflationary arguments of the MPC hawks. With demand clearly waning and price pressures on the consumer level subdued, the BOE will feel greater pressure to ease rates once again at their next meeting in May. As a result EURGBP set another lifetime high of 8065 as the pair continues its parabolic run which is unlikely to end until euro bullish sentiment changes.

Finally in US today, the markets will get a read on March’s PPI report as well as the most recent TICS and Empire Manufacturing data. The TICs report, though generally ignored as of late may turn out to be the most important piece of data in the long run. Given the turmoil in the financial markets it will interesting to see if US can continue to attract foreign capital. The last two months have seen a sharp drop off in flows and if that trend continues the greenback may soon have to deal with structural balance sheet issues in addition to present day concerns about the state of the US economy. Overall however, today’s data may not make much of a dent and the EURUSD could spend the rest of the day in a tense standoff between the bulls and the bears as everyone searches for the next big theme to trade.

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[B]To discuss this article please contact Boris Schlossberg, Senior Curency Strategist: [/B]bschlossberg@fxcm.com