Euro volatile despite contracting trade balance deficit

05-18-2009 11:08

The headline outlook for the eurozone trade balance proved a surplus of 0.4B with the smallest deficit within a year and on a seasonally adjusted basis at -2.1B, while the Euro continues its volatile status. Shipments to the UK and US decreased by at least 25% despite an improvement in overall exports. Demand for machinery, manufactured goods and vehicles declined as well as the demand for energy products. The Euro did not surpass the 20-Day SMA at 1.3423 and traded between 1.3425-1.3475.

Eurozone continues its weakness

The eurozone economy remains weak which led to additional accommodative monetary policy by the European Central Bank. It remains questionable if the central bank will be able to come up with an unanimous future policy plan. According to Ewald Nowotny, council member of the central bank, the growth forecast for June will be revised downwards, while he signals the end of the economic recession. Last week’s comments indicated that decision makers have not reviewed additional actions ahead of purchasing covered bonds. The central bank may attempt to reduce outlook for an increase of the purchases program and additional rate cuts.

Rightmove house price index rises

During the initial European trading the Pound Sterling rose gradually on the back of improving optimism stimulated by the recovering housing sector. The Rightmove house price gauge went up by 2.4%; the biggest rise within a year due to demand boosted by easing lending standards. The measures by the BoE concerning quantitative easing decrease the costs of borrowing and ease the credit markets. Optimism may increase as retail sales is expected to have improved by 0.5% in April. Bullish sentiment could be frustrated by the Consumer Price Index and by the Bank of England minutes. However, surprises are not expected taking into consideration the quarterly inflation report. According to the central bank’s outlook, prices will not surpass the 2% target until 2012, which resulted in extending their quantitative easing measures at their previous reunion.

Dollar threatened by rising optimism

The Dollar decreased against the commodity currencies and British Pound but increased versus the Euro and Japanese Yen. US futures indicate to a higher open on the back of increasing optimism while European stock markets begin to find support. The Dollar will suffer the consequences of the global markets recovering, which is proved by the present recession loosing pace in the UK and in Japan. The NAHB housing market gauge is expected to improve from 14 to 16 and together with tomorrow’s recovery in housing data it shows that the end of the downturn is nearing. Credit markets are easing which is proved by the TED spread contracting to its lowest level since before the recession started. For that reason, the Dollar may decline due to safe-haven flows seek high-yielding assets while the domestic growth prospects could improve.