The EUR/USD Edges Higher but Soft Inflation Caps the Currency Pair

The EUR/USD moved higher but remains range bound as lower than expected inflation failed to buoy the greenback.  German unfilled orders continue to rise which shows that growth in the EU’s largest economy is strong despite subdued inflation.UK inflation was unexpectedly softer than expected.

Technicals

The EUR/USD moved higher bouncing off support near the 10-day moving average at 1.2336. Resistance is seen near a downward sloping trend line at 1.2420. Despite the rangebound nature of price action, momentum is positive as the MACD (moving average convergence divergence) histogram is printing in the black with an upward sloping trajectory which points to higher prices.  The fast stochastic continues to climb reflecting accelerating positive momentum.

Eurozone March HICP inflation revised down

Eurozone March HICP inflation revised down to 1.3% year over year from 1.4% year over year reported initially. This follows the downward revision to Italian numbers yesterday and still saw the headline rate reversing the dip to 1.1% year over year in February and moving back to the level seen at the start of the year. HICP averaged just 1.2% in Q2, down from 1.4% in Q4 last year. However the first quarter this year was impacted by special factors and the variations over the last couple of months were mainly due to base effects. Core inflation actually held steady throughout the last three months at 1.0% year over year, up from 0.9% through the last quarter of 2017. And core excluding energy and unprocessed food actually rose to 1.3% in March, from 1.2% in February.

German unfilled orders continue to rise

Orders and production numbers may have been disappointing last month, but special factors, such as adverse weather condition, the early timing of Easter and a flue epidemic all meant that data may have been less indicative of underlying trends than usually. And data on unfilled orders from the German stats office today highlight that the German economy is still running hot, with the price adjusted stock of orders rising 1.0% on the previous month, with domestic orders not yet completed up 0.3% m/m, the stock of foreign orders 1.3%. The ratio of unfilled orders and turnover suggests that the range of the stock of orders in manufacturing was 5.6 month, up from 5.5 months in January. This means without new orders, companies would need 5.6 months to complete the orders on hand. The ratio is highest among capital goods producers, which have orders for 7.7 months. The index of unfilled orders has been rising sharply since the middle of 2016, which ties in with surveys reporting that capacity constraints are limiting production growth.

German public sector wage deal confirms uptrend in wages

German public sector wage deal confirms uptrend in wages. Service Sector Union Verdi and public sector employers have wage hikes in three steps. The first sees a 3.2% rise retrospectively from March 1, followed by a further 3.1% in April next year and finally a 1.1 % hike in March 2020.

German recession risks rises, amid greater uncertainty.

German recession risks rises, amid greater uncertainty. Forward looking indicators for Germany signal a greater risk of recession: ZEW investor confidence now is in negative territory, signaling that pessimists outnumber optimists for the first time since 2012 and at least one recession indicator from the German IMK institute is showing a 32% chance of recession amid heightened volatility in markets and subdued production. That risks are on the rise is pretty clear and so is uncertainty amid trade jitters, geopolitical risks, a still strong EUR and the ECB’s path towards policy normalisation. At the same time, Germany clearly is running above capacity and a slowdown in growth dynamics actually quite healthy – indeed, German index of unfilled orders rose to a record high in February and PMIs surveys suggest that part of the slowdown in production is due to capacity constraints. Furthermore production data for the first quarter are likely to have been distorted by special factors – not just in Germany. The unusually long and cold winter, a flue epidemic and the earlier timing of Easter are all likely to have left their mark. Even the IMK has not revised its outlook so far, but clearly risk signals are starting to flash and are something to keep an eye on. In our view the central scenario remains a gradual slowdown in German growth momentum and as Nowotny has suggested one could argue that this supports ECB action sooner rather than later as the ECB risks falling behind the curve.

UK March inflation data were unexpectedly soft

UK March inflation data were unexpectedly soft, with headline CPI falling to a 2.5% year over year rate from 2.7% and core CPI ebbing to 2.3% year over year from 2.4%. The respective median forecasts had been for 2.7% year over year and 2.4%. The headline rate is the lowest print since March last year. The data puts into question the possibility for the BoE to hike rates at its May policy meeting, and both sterling and UK yields have fallen as a consequence. The largest downward contribution came from clothing and footwear, along with the impact of changes in the budget cycle with regard to alcoholic drinks and tobacco.