Euro falls on weak fundamentals and rising optimism bolsters risky assets

06-12-2009 10:12

The Euro dropped during last night’s trading on the back of disappointing fundamentals which affected risk appetite. Eurozone´s manufacturing dropped by 1.9% in April, which extensively surpassed the forecasted -0.4% and led to a -21.6% on a yearly basis. For the first time since 1957 the French Consumer Price Index (CPI) dipped into negative territory and resulted in an annualized drop of -0.3%. The overall situation in the eurozone showed declining prices while also the German wholesale price gauge fell by 8.9%; a 22-year record-high. According to the ECB, inflation will approach the 2% target again in the last quarter of 2009 before suffering a negative period during the next months.

26.7% reduction in durable consumer

Eurozone’s drop in prices was mainly caused by energy prices, which fell by 4.0% and by a major decline of 2.7% in capital goods. Energy prices could rise again as increasing oil prices stimulate producers to benefit from potential growing profits. Nevertheless, declining capital goods will affect the outlook for a swift recovery in the eurozone. The intensity of the cutback by consumers is proved by the 26.7% decline in durable goods. Therefore it is not likely that previous levels will return in the near future. The 20-Day SMA continues to stimulate the pair at 1.3984 which prevented a similar development like the head & shoulders pattern. For that reason, the bullish pattern continues its strength and in anticipation of the pair surpassing the technical level the Euro seeks gains.

Another uptick in consumer sentiment?

During last night’s trading the Dollar did well due to comments by the Japanese Finance Minister Kaoru Yosano, who stated that the worldwide respectability of the Dollar remains secure and that Japan’s trust in US debt is “unshakable”. There are countries which prefer another world reserve, but the liquidity and security of US public funds result in a strong position for the US Dollar. The consumer confidence assessment by the University of Michigan is expected to increase from 68.7 to 69.5, which could be a record level versus September 2008. Higher-yielding assets have been boosted by increasing optimism as rising consumer sentiment could be another impulse. For that reason, the US Dollar may remain weak due to increasing risk appetite as traders seek currencies that will profit from a jump in internal demand. Nevertheless, that relationship should be followed closely, while positive fundamentals will start to create bullish Dollar price action.