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Wednesday, November 05, 2014

EUR Plummets as Euro Growth Splutters

Market consensus believes that the Eurozone is edging towards that moment when the scourge of deflation actually becomes a reality.
Euro data is constantly reminding investors that the region’s economy is barely limping along, and this despite eurozone companies slashing selling prices as they attempt to improve sales in the face of a weakening economy and slowing new-orders. Corporate deflationary reactions like this only hurt a company’s bottom line by squeezing profit margins even further. The obvious knock on effect will limit resources for hiring and investing, which in turn only dampens any chances of an economic rebound, again putting the region into a bigger hole.
Euro growth sputtering
This morning’s Euro releases showed that private sector activity in the Eurozone grew less rapidly than first estimated last month. The Markit composite PMI rose slightly to 52.1 from 52.0 in September (the initial flash estimate was 52.2). Even the services PMI was revised down, to 52.3 from 52.4. Collectively, this is further proof that there is no sign of a pick up in euro-growth. Data like this will only pile further pressure on the ECB to beef up its stimulus program.
Digging deeper, it seems that the peripheral countries are still surprising, especially Italy’s return to expansion. The growth activity in Ireland and Spain even accelerated during the month. Nevertheless, peripheral countries optimism is being diluted by questionable business and consumer confidence.
The real worry for Europe is Germany and France, the supposed collective backbone for Europe. Germany is losing momentum (53.9) and France continues to hover in contraction territory (48.2). Tomorrow, investors can expect the ECB to hone in on the uneven Euro growth scenario and how fragile it has become, especially after cutting its Euro growth forecasts for this year and next earlier this week. Policy members again cited the usual concerns – the lack of internal investment and political tensions in Ukraine and the Middle East. It’s not a surprise that the EU’s executive arm expects the region’s inflation to remain well below the ECB’s target until 2016. The combination of low growth and low inflation suggests that the ECB needs to be more aggressive with its stimulus measures to prevent disinflation becoming a deflation reality.
ECB leadership discord
However, tomorrow’s ECB meet is expected to come too soon for anything too aggressive (large scale purchases of government bonds and other assets) from policy makers. The rumored rising opposition to Draghi’s policies within the Euro council could also limit the ECB’s president’s ability to get a firm “majority” backing for further stimulus, again reducing the probability of new ECB action in the short-term.
For the techies, in respect to the EUR, their pullback objectives have been met. The rumored ECB discord yesterday managed to push the single unit, not once but twice, to the desired spec selling levels atop of €1.2565 region. The second run up in the Asian session was met by a heavier hit from speculative selling, buoyed by the US midterm election results and obviously this morning’s tepid PMI data. The EUR outright has also been pressured by its performance on the crosses, especially EUR/CHF (€1.2037) where the market ahead of the Swiss November gold referendum, which if passed could limit SNB policy moves. A new seven-year high for USD/JPY (¥114.56) is also influencing the single unit as broad dollar gains begin to make an impact after the U.S Republican Senate results.
The market does have a tendency sometimes to over read the political impact. An easing of the U.S political deadlock is not guaranteed. If that’s the case, then investors should be weary that the strong support for the “mighty” dollar could evaporate just as quick. Again trading sub-€1.2500 will boost the EUR bear’s ego, targeting something with a €1.2100 handle in the medium term, while EUR resistance remains close to €1.2567-75 for the time being. For deeper directional play, investors will wait to see what transpires at tomorrows ECB meet, in particular, what is said at the press conference. With the Fed changing focus somewhat and pumping up the U.S labor market, Friday’s NFP release becomes more important than before.
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