Heavy Economic Calendar and the EUR in Focus

We saw the EUR bounce back through the European session on Monday, with the markets responding to Chancellor Merkel’s views on the weakness of the EUR, the surge coming despite the German government having continued to call for a shift in monetary policy by the ECB in the interest of strengthening the EUR.

The comments were unlikely to have been prompted by pressure from the U.S administration that had previously highlighted Germany as one of the economies benefiting from more favourable trade terms off the back of a weaker currency, Trump and the team currently busy fire fighting as the press and the Democrats unite in an offensive against the Republicans.

From a German economic standpoint, there’s little incentive for the EUR to break through to $1.20 levels and with the ECB in the driving seat on the path of the EUR, Merkel may be seen to have done her part for now, just in time for the G7 on Friday.

Economic data out of the Eurozone has certainly assisted in the EUR breaking out of its post-Trump election victory ranges, with solid economic data out of the Eurozone contributing, though one would hazard a guess that the Trump unwind has had more influence.

We have seen the ECB persist with its dovish outlook on monetary policy and all of this comes despite the pickup in economic activity and inflation.

Macroeconomic data out of the Eurozone today includes May’s prelim private sector PMI figures for France, Germany and the Eurozone, together with Germany’s May IFO Business Climate Index.

Forecasts are pointing to a mixed set of figures, with the IFO Business Climate Index expected to rise, whilst the Eurozone PMI figures are expected to soften on April numbers, though marginally. We would expect the stats to be a positive for the EUR, should the numbers be in line with or better than forecast, private sector activity certainly having seen a boost this year, the icing on the cake for the EUR bulls being any signs of a pickup in inflationary pressures. The ECB can’t go on ignoring the economy and the numbers for ever and Merkel may get what she asked for, which is perhaps not what is wanted, German exporters enjoying the current trade environment. It’s no surprise that Germany’s trade surplus is the largest amongst the EU nations, hence the Merkel EUR chatter.

This morning’s 2^nd estimate, 1^st quarter GDP figures for Germany were in line with 1^st estimate and forecasts, providing the EUR with little support ahead of the bulk of the stats scheduled for release through the morning, the markets perhaps wanting to see more from the German economy.

The bad news for the EUR remains the lack of progress on the EU and the IMF reaching an agreement with Greece on debt relief, the Greek economy continuing to sit under a dark cloud, with austerity measures holding back any hopes of a near-term economic recovery in support of regional growth. An agreement is yet to be dead and buried, with a decision on debt relief now postponed to mid-June, which will coincide with the French parliamentary elections and well in advance of German elections in September.

We would hazard a guess that any debt relief would be poorly received and more so in Germany than other parts of the EU, the political arena more of hurdle for Greece than the more widely accepted notion that without debt relief, any hopes of a Greek recovery would be slim at best.

EUR strength has been met with Dollar weakness of late, the weakness in the Dollar coming off the back of, not only from the noise from Capitol Hill, but also mixed macroeconomic data going into the 2^nd quarter.

The markets have yet to be convinced of the much talked about rebound in the U.S economy in the 2^nd quarter, so until the stats start to show that the economy can pick up pace amidst the Trump chaos, it’s hard to see the Dollar making any meaningful recovery, with the Dollar Spot Index languishing down at sub-100 levels, despite the odds of a June rate hike sitting at just shy of 80%.

With a lack of stats from the UK, the pound will continue to be pushed and pulled on noise over Brexit, the UK General Election polls and market sentiment towards BoE monetary policy. Today’s inflation report hearing will provide some direction on the pound, though for the pound to break beyond $1.30 levels, there will need to be an acknowledgement that the economy is likely to maintain course through the year, which is highly unlikely so soon after the May MPC, despite economic data out of the UK impressing amidst the inflation overshoot.

Looking across the pond, May’s prelim private sector PMI figures will certainly be a factor together with new home sales, though the markets are likely to tread carefully for now, noise from Capitol Hill just too loud for the to be ignored, with questions mounting over whether the FED will be willing to make a move should the investigations not have come to an end before the June meeting.

At the time of the report, the Dollar Spot Index is up 0.03% at 97.009, with the EUR having coughed up intraday gains to move into the red, the failure to agree on debt relief for Greece contributing to the downside, the EUR down 0.03% at $1.1233 at the time of the report. The bombing in Manchester on Monday evening has had little impact on the pound, which is treading water at just shy of $1.30 levels, while election campaigning is suspended, as the UK Prime Minister prepares to hold the emergency Cobra meeting this morning.

While macroeconomic data out of the Eurozone will influence the EUR, we expect the Dollar to make up some lost ground through the European and U.S sessions, with tomorrow’s FOMC monetary policy meeting minutes unlikely to show the FED taking its foot off the gas vis-à-vis normalizing monetary policy.