USD Boosted by Weak European and UK Data

The USD continues to recover after the Federal Reserve Minutes took the wind out of its sails last week. Lower industrial production out of Japan (–1.9%), a flat German CPI (0.0%) were USD positive releases this morning. Even though the European Central President spoke at an event, Mario Draghi stuck to the matter at hand. Speaking at the Statistics Conference in Frankfurt the ECB president he outlined the importance of the continuing integration between the central bank regulatory functions and the data. The market is awaiting the US Retail Sales figures to decide if the USD will continue to recover versus the EUR and other major currencies.

The Swiss ZEW report came in way under expectations at –30.7 with a previous print of –7.7. The survey measures the optimism of analysts and investors at large institutions for the next six months. A reading above 0.0 is optimistic. This drop follows a similar negative move in the German ZEW survey fell yesterday into negative territory. Two european powerhouses are beginning to show that they are not immune to the economic ill that have ailed the rest of Europe. Chronic low inflation and geopolitical turmoil in the continent have taken its toll. The German government yesterday cut its growth forecast for this year from 1.8% down to 1.2%. If the engine of growth in the eurozone is stalling there are big question marks on how the member of the european union will react and take appropriate actions to spark growth and beat deflation. The main reason holding the ECB from releasing further stimulus into the EU’s economy is the lack of agreement from member states on the size and nature of the measure that will be taken. The ECB has done its part, and now the european commission will have to mediate to reach a compromise between divided factions.

Slow inflation is keeping to the GBP on the back foot versus the USD. UK inflation growth is at a 5 year low and the GBP/USD pair is back close to 1 year lows. Inflation is a key indicator given the Bank of England’s plans to hike rates in the mid term. If there is no or low inflation it would be premature to raise rates as the growth of the country would be compromised by falling prices and higher cost of credit which would have a compounded effect on consumption. The US Federal Reserve continues to have the lead as the most likely central bank from the major economies to raise rates. The BOE had a strong string of data earlier this year, but comments from the central bank governor and disappointing data keep pushing back the data of an actual rate rise.

Upcoming events:

USD PPI (Producers Price Index)
USD Retail Sales

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Alfonso Esparza

Alfonso Esparza

Senior Currency Analyst at Market Pulse
Alfonso Esparza specializes in macro forex strategies for North American and major currency pairs. Upon joining OANDA in 2007, Alfonso Esparza established the MarketPulseFX blog and he has since written extensively about central banks and global economic and political trends. Alfonso has also worked as a professional currency trader focused on North America and emerging markets. He has been published by The MarketWatch, Reuters, the Wall Street Journal and The Globe and Mail, and he also appears regularly as a guest commentator on networks including Bloomberg and BNN. He holds a finance degree from the Monterrey Institute of Technology and Higher Education (ITESM) and an MBA with a specialization on financial engineering and marketing from the University of Toronto.
Alfonso Esparza