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Euro hits 3-month low after German data surprise
Asian shares hit one-year highs on Friday and bond yields were on track to notch up a broad-based rise on the week, but European markets softened after a closely watched measure of German business confidence came in weaker than expected.
The Ifo business climate index fell in May to its lowest this year, following data that showed growth in the first quarter in Germany was its strongest in three years but gave a dimmer outlook for the coming quarters.
This raised expectations that the European Central Bank will ease policy next month, pushing the euro down to a three-month low against the dollar and breaking long-term technical support that had held firm for almost nine months.
"The renewed fall in the Ifo in May suggests that the German recovery may be slowing. We expect annual GDP growth of about 2 percent this year and next, which will not be strong enough to drive a rapid recovery across the euro zone or to eradicate the threat of deflation," said Jennifer McKeown, senior European economist at Capital Economics.
The euro was down a fifth of 1 percent on the day at $1.3630 , the lowest in three months and crucially below technical support at the 200-day moving average of $1.3636.
The euro has flirted with that support three times this week but has not closed below it. This could be the first day it has done so since early September last year.
Sovereign credit ratings upgrades on Friday for Spain and Greece had little impact on European markets as their respective economies have been improving for some time
Investors were also reluctant to take on too much risk ahead of European election results and a presidential election in Ukraine this weekend, and because British and U.S. markets are closed on Monday, which will dry up market liquidity.
"In places like Italy and Greece we don't have properly elected governments, they are just cobbled together, so this weekend's results will play on people's minds," said Marc Ostwald, a strategist at Monument Securities.
In early trading Friday, The FTSEuroFirst 300 index of leading European shares was down 0.1 percent at 1365 points , Germany's DAX was flat at 9719 points and Britain's FTSE 100 was down 0.2 percent at 6807 points.
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Next stop for the EURUSD is the 1.36 where my target is set.
German May Business Confidence Weakens; Domestic Spending Boosts Q1 Growth
Confidence among German firms deteriorated more-than-expected to a five-month low in May, signaling growth may ease in the second quarter.
A detailed report from Destatis today showed that the Germany's economic growth rebounded in the first quarter as initially estimated, solely driven by domestic demand.
The business confidence index fell to 110.4 in May from 111.2 in April, a monthly survey of 7,000 firms, conducted by Ifo Institute showed Friday. The score was forecast to drop to 110.9.
Companies were also less optimistic about future business developments and a lull was seen in the German economy in May.
The current conditions index dropped to 114.8 from 115.3 in the previous month, while it was forecast to rise to 115.4. Expectations among businesses also declined in May, and the index fell to 106.2 in May from 107.3. The reading was below the consensus of 106.5.
Confidence among manufacturers weakened slightly in May, but remained at a high level. After a sharp increase, confidence in wholesaling declined markedly. Sentiment among contractors also decreased due to the weakness in current and future expectations.
In the service sector, the business climate index deteriorated to 21.4 in May from 22.1 in April. While assessments of the current business situation were less favorable than last month, outlook was more optimistic.
The renewed fall in the Ifo business climate in May suggested that the recovery may now be slowing, Jennifer McKeown, a senior European economist at Capital Economics said.
The European Central Bank will probably be rather less relaxed about the Ifo setback, since the economy elsewhere in the Eurozone is not resilient enough to balance out the external risks, Joerg Kraemer, chief economist at Commerzbank said.
Destatis said quarterly growth in gross domestic product doubled to 0.8 percent from 0.4 percent in the fourth quarter. The rate came in line with the provisional estimate published on May 15 and marked the fastest expansion in three years.
One of the reasons for this rebound at the start of the year was the extremely mild weather. Bundesbank, early this week said, growth will slow in months ahead after mild weather boosted expansion in the first quarter.
On a calendar-adjusted basis, GDP grew 2.3 percent year-on-year, faster than the 1.4 percent rise seen in the fourth quarter. This was the largest increase in over two years. The statistical office confirmed the annual figures.
Gross fixed capital formation advanced at a faster pace of 3.2 percent from the previous quarter, when it gained 0.7 percent. Companies increased their investment as interest rates are too low.
Household final consumption expenditure increased 0.7 percent. At the same time, general government expenditure grew only 0.4 percent.
However, the balance of exports and imports had a downward effect on the GDP growth. The increase in exports slowed to 0.2 percent from 2.5 percent, while the increase in imports accelerated to 2.2 percent.
The European Commission projects the biggest euro area economy to grow 1.8 percent this year and 2 percent in 2015.
source
Spain, Greece Receive Rating Upgrades
Spain and Greece sovereign ratings were upgraded on Friday by major rating agencies as remedial measures taken by both nations over the last few years started to support economic recovery and revamp fiscal positions.
Citing improved economic growth and competitiveness, Standard & Poor's Ratings Services raised the long-term sovereign ratings of Spain to 'BBB' from 'BBB-'. The 'stable' outlook on ratings suggest that the risks to the ratings remain balanced over the next two years.
Elsewhere, Fitch Ratings lifted Greece rating by one notch as the nation posted a primary surplus amid easing near-term sovereign liquidity risks. Although the ratings were raised to 'B' from 'B-', it still remain in junk territory.
Reflecting the effects of labor and other structural reforms, Spain's economy is set to grow more than previously estimated, S&P said. The agency upgraded the real growth projections for 2014-2016 to 1.6 percent from 1.2 percent.
S&P believes the recovering economy will support Spain's fiscal consolidation and help public debt to decline slowly as private debt continues to be gradually paid down.
Net export growth continues to be a major contributor to GDP. Nevertheless, S&P said the still very high debt levels in the economy will probably lead to an extended period of relatively subdued domestic demand.
The rating agency expects that recovering employment will contribute to improvements in Spain's fiscal position and the stabilization of financial system asset quality.
Fitch noted that Greece achieved a primary surplus in the general government account in 2013, a key target of the EU-IMF programme. The agency forecasts the adjusted primary surplus to rise further in 2014 to 1.4 percent of GDP.
Moreover, near-term sovereign liquidity risk has fallen and a better fiscal track record is being established. The government is not fully funded by EU and IMF lending over 2014-15 but there are several plausible options to bridge the funding gap.
With the most challenging phase of Greece's adjustment behind it, the rating is becoming less sensitive to policy holdups and political crises, Fitch said.
The 'stable' outlook reflects Fitch's assessment that upside and downside risks to the Greek rating are currently balanced.
S&P today affirmed the ratings of Netherlands at 'AA+' with 'stable' outlook. The rating reflects the assessment of the country's wealthy, diversified and competitive economy, visible in its strong external position and high per capita GDP.
S&P also affirmed the ratings of Switzerland, Georgia and Turkey. Switzerland has 'AAA' rating and 'stable' outlook. S&P noted that the Swiss Confederation has a prosperous, competitive, and diversified economy with a strong external position and significant monetary flexibility.
S&P maintained the ratings of Turkey at 'BB+/B'. According to agency, Turkey's policy environment has become less predictable, and that this could weigh on the economy's resilience to external shocks and hamper its long-term growth.
The outlook on Turkey remains negative indicating one-in-three chance of a hard economic landing.
Georgia's ratings were affirmed at 'BB-' by S&P. Although the country's longer term growth prospects is set to remain strong, it will likely be tempered by subdued investment and frailties in both the regional economy and political environment in the short term, the agency stated.
source
EURUSD - 1.36 is ne next Bus Stop!
German Leading And Coincident Index Continue To Rise In March
The leading index for Germany, measuring perceptions about future economic conditions in the country, increased month-over-month in March, though at a slower rate, the Conference Board announced Friday. The coincident index also rose in March.
The Conference Board's leading economic index rose 0.3 percent in March after a 0.6 percent increase in February. Four of the seven components making up the headline number improved in the month.
Consumer confidence, new residential construction orders, the yield spread and inventory change contributed positively to the overall index. However, new orders in investment goods industries and stock prices dragged down the rate of increase of the leading index.
The coincident index, measuring present economic conditions, rose 0.1 percent in March following a 0.3 percent rise in February.
The leading indicator has been rising since December 2012 and the coincident index since March 2013, indicating that economic growth will continue to improve in the near future, the report said.
source
EUR/USD forecast for the week of May 26, 2014, Technical Analysis
The EUR/USD pair initially tried to rally during the week, busting back above the 1.37 handle. However, we found enough resistance above to push the market back down and form a negative candle. It now appears that we are heading towards the 1.35 handle where we would test significant support again. That being the case, we are bullish of this market and fully anticipate supportive candles to be reason enough to start buying on short-term charts with a longer-term bias. Ultimately, if we get below the 1.35 level, things get really ugly
In euro-friendly Germany, the skeptics are a sideshow
In Italy, the thundering Beppe Grillo, leader of the Euroskeptic Five Star Movement party, routinely draw tens of thousands of spectators to his open-air rallies. So does Marine Le Pen, president of France’s the even more Euroskeptic National Front.
In Germany, there is nothing of the kind as voters go to polls in the European Union parliamentary elections, the world’s second biggest election after India’s. The squares in the big cities are largely candidate-free zones, the campaign posters sparse, the political graffiti virtually non-existent.
The pre-election sea of calm ahead of the Sunday vote does not just reflect traditionally sober and unruffled Germany behaviour. It reflects the lack of interest in endorsing right-wing nationalistic parties – no surprise given the horrors of the Nazi era – and low enthusiasm for the Euroskeptic, or anti-European Union movement that is sweeping through large swathes of the 28-country EU.
Germans rather like the EU the way it is. They know that integrated economies are unlikely to go to war with one another. They didn’t hate the crisis that crippled the debt-soaked Mediterranean countries. Germany went through the crisis relatively unscathed and was able to boost its exports, thanks the lower value of the euro, which made German products cheaper for foreign buyers.
“Germans are in general satisfied that the crisis was handled well,” says Gunther Krichbaum, the parliamentarian who is chairman of the committee on European affairs in Chancellor Angela Merkel’s centre-right government. “Trust is coming back to Europe.”
Germany’s largely benign attitude toward the EU and its institutions helps to explain the expected poor showing by the country’s few far-right parties and its biggest Euroskeptic party, Alternative for Germany, which failed to make the 5-per-cent threshold that would have given it a couple of seats in the 2013 German general election.
In the current EU election, Alternative for Germany is polling between 5 per cent and 7 per cent, enough to give it a mere four or five seats in the 751-member European Parliament. No other German Euroskeptic party will even come close.
German voters, who tend to take democracy seriously, are well aware of the upstart party. But most of them consider it too far right on the political spectrum, too nationalistic or representative of a vision for Europe that does reflect Germans’ traditional pro-Europe views. The party has no love for the euro, is against the sovereign bailouts that rescued Greece, Ireland and Portugal from oblivion, and thinks the weak euro zone countries should hit the road and reprint their old currencies.
“Draghi gambles, you pay,” reads one of its campaign posters, referring to European Central Bank president Mario Draghi and his various programs to keep the euro zone intact.
Kevin Patelscheck, a 22-year-old Berliner who works a hotel and is about to enter a hospitality management school, said he seriously considered voting for Alternative for Germany but will instead go for Ms. Merkel’s Christian Democratic Union (CDU). “I agree with them that Germany is paying too much for Europe,” he said. “When countries make mistakes, it is Germany that has to pay. But they are also nationalistic and being nationalistic in Germany is only really allowed at football games.”
Alternative For Germany knows that it will not do particularly well in these elections, but equally knows that it’s doing fairly well for a party that did not exist a year ago. The party has attracted upper-middle-class conservatives and the small band of Germans who think their country would be better off if the euro zone were dismantled, even though Germany’s economy is expanding and most big German companies are wedded to the the ease of using a single currency in a single market.
“People don’t see wealth coming from the EU, but they see the regulations,” says party candidate Jorge Meuthen, a professor of economics at Kehl University of Applied Sciences. “They are waking up because they see more costs than benefits.”
The polls say otherwise, at least in Germany. Alternative for Germany is bound to be envious of the success of is counterparts in France, Italy and Britain when the votes are tallied on Sunday.
|EUR/USD Forecast May 26-30
EUR/USD dropped for the third consecutive week as monetary easing from the ECB seems more real. European Parliamentary Elections, employment data, retail sales and a series of speeches from Draghi are the highlights of this week. Here is an outlook on the main market-movers coming our way. Here is an outlook on the highlights of this week and an updated technical analysis for EUR/USD.
German, French and Eurozone Manufacturing PMIs all softened in April failing to live up to market expectations. Another disappointment came from the German IFO Business Climate. The Euro-area recovery remains lukewarm and highly dependent on Germany’s strength. The pressure from the data was joined by incessant talk from ECB officials about action in June. It seems that a negative deposit rate could be joined by additional measures. In the US, the FOMC minutes did not consist of many surprises, yet the Fed already looks to the day that easing ends. Does the pair have more room to fall?
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EUR/USD weekly outlook: May 26 - 30
The euro fell to three month lows against the broadly stronger dollar on Friday after data showing that German business sentiment deteriorated in May added to expectations for easing by the European Central Bank at its upcoming June meeting.
EUR/USD hit lows of 1.3616, the weakest since February 13 and settled at 1.3630, 0.18% lower for the day. For the week, the pair lost 0.60%.
The pair was likely to find support at 1.3560 and resistance at 1.3660.
The drop in the euro came after a report showed that the German Ifo business climate index declined to 110.4 in May; the lowest reading this year, from 111.2 in April, indicating that economic activity could slow in coming months.
The data came one day after a report showing that manufacturing activity in the euro zone expanded at the slowest rate in six months in May.
Recent comments by senior ECB officials have signaled that the bank is open to acting as soon as June to stop inflation in the currency bloc from falling too low.
On Thursday, ECB Governing Council member Jens Weidmann said the bank is prepared to take unconventional measures to counter the risks of low inflation in the euro zone.
The dollar was boosted after data on new home sales added to signs of a recovery in the housing market.
The Commerce Department reported that sales of new homes rose by a larger-than-expected 6.4% to 433,000 in April, after two months of decline. Analysts had been expecting a figure of 425,000. March's number was revised up from 384,000 to 407,000.
Elsewhere, the euro fell to 17 month lows against the pound, with EUR/GBP hitting 0.8082, the lowest since December 2012 before pulling back to 0.8099 at the close.
EUR/JPY ended Friday’s session at 139.02, not far from the three-and-a-half month trough of 138.13 struck on Wednesday.
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