Thursday May 15, 2008 - 11:14:36 GMT
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Forex Research - Euro Rises Then Falls as Cool Inflation Offsets Strong GDP- Will ECB Remain Hawkish?
â€¢ New Zealand Dollar: Retail Sales weaken for 2nd month in a row
â€¢ Japanese Yen: Machine orders drop
â€¢ Euro: GDP stronger but inflation cool
â€¢ Pound: Lags euro on data free night
â€¢ US Dollar: TICs on tap
A rollercoaster night in EURUSD as the currency pair was first lifted by better than forecast GDP numbers only to fall below the key 1.5500 level once again after inflation data revealed that core CPI readings have eased dramatically. Both German and French GDP numbers posted blockbuster results with German Q1 GDP rising 2.5% vs. 1.8% projected while French growth increased 2.2% vs. 2.0% expected. The two main economies of the EZ contributed to a better overall number for the region which also printed at 2.2% vs. 1.9% forecast.
The news helped to push the pair to a session high 1.5546 as better than expected Q1 growth in the EZ stood in stark contrast to the major slowdown in the US economy. The celebration, however, did not last long. The unit quickly reversed course after the core CPI EZ inflation data printed at 1.6% significantly lower than the 2.0% expected.
The inflation readings suggest that despite record high energy costs, price pressures in the EZ may be easing - no doubt partly due to the uber-strong currency which has made imports far more affordable for Europeans. Todayâ€™s inflation data should pacify some of the stauncher hawks at the ECB and could open the way for possible consideration of a rate cut by the end of the summer.
However, given the strong GDP readings, EZ monetary authorities could make a very credible case that no easing is necessary as the regionâ€™s economy appears to have weathered the credit crunch in the financial markets far better than most analysts had forecast. Nevertheless, Q2 may prove to be far more challenging for the 15 member union as record high exchange rates, skyrocketing energy costs and global slowdown in demand may take their toll on growth going forward. Therefore, todayâ€™s tepid inflation numbers are especially important in such a context because they remove the primary objection to a rate cut â€“ namely that prices pressures are no longer escalating throughout the system.
As North America opens for trade attention will turn to the TICS report and the manufacturing data from Empire and Philly Fed surveys. Markets are looking for mixed results, but most recent economic data has suggested that lower dollar has helped US manufactures and if that turns out to be true today, the greenback may get another boost as EURUSD moves further away from the 1.5500 figure.
Is The Euro Headed Below 1.500? Join us in EURUSD Forum
To discuss this article please contact Boris Schlossberg, Senior Curency Strategist: [email protected]
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