Euro rises on positive German data‎ and UK inflation within target band

04-21-2009 14:45

The German ZEW release exceeded expectations, which boosted sentiment for the first time in two years, as the Euro rose by 45 pips. The EUR/ USD went up to 1.2991 and extended its earlier gains on increasing risk appetite. German producer prices dropped in March by 0.7% and resulted in a negative annualized reading for the first time in five years. Fear of deflation will increase due to the 0.5% downfall through which it’s more likely that the European Central Bank decides on quantitative easing at the following policy meeting.

Increasing demand, layoffs at slower pace: end of current downturn?

Nevertheless, decreasing inflation is one of the causes that investor confidence is recovering as it results in growing purchasing power by consumers. Rising demand could reduce the pace of dismissals, which could end the present recession. Furthermore, the situation of the credit conditions deteriorated at a slower pace, which increases the prospects that consumers and businesses will be able to obtain the required funds. For that reason, this could be the right moment for the central bank to extend their attempts to increase the pace of the recovery.

UK inflation within BoE’s target band

UK CPI dropped from 3.2% to 2.9% in March, while the Pound increased during last night’s trading. Inflation has been between the BoE’s 1%-3% target range for the first time in a year. Still, core prices went up from 1.6% to 1.7% as prices absent gasoline and food became stable. Household goods and clothing prices went up 2.0% and 1.1%, which may indicate that demand is returning and this could be proved by the retail sales figures this Friday. The Bank of England will be able to evaluate its results and finish its present purchasing program without taking into consideration additional actions if prices remain stable, which could support the Pound. The 100-Day SMA remains a source of support at 1.4527 but should the GBP/ USD fall under the technical level then downside risks could rise.

Bank of Canada leaves benchmark rate unchanged

A Dollar rally was the result of yesterday’s desire for safe-haven and is followed by decreasing concerns due to sufficient ‘green shoots’ to provide investors prospects that an improvement is near. If risk appetite continues to grow today, the Dollar may lose some of yesterday’s gains. Today, five Dow components will publish their results, including DuPont, Merck and Caterpillar, Coca Cola and United Technologies, which may increase the influence of the earnings calendar on overall risk sentiment. The imminent Bank of Canada rate decision will be the major event risk from the North American trading session and the central bank will probably leave their benchmark rate unchanged. Still, the committee will state quantitative easing actions which could result in more ‘loonie’ weakness. However, the currency could already have anticipated on a major part of the move since it lost over 300 pips versus the greenback.