Europe’s economy is finally picking up, demonstrated by stronger- than-expected economic data out of its largest economy. Strong data from Germany showed the region’s strongest economy was gaining traction, as the common currency area shows signs that the recession is nearing its end.
A series of improving economic data releases renewed optimism towards the region. Apart from a surging ZEW economic sentiment survey from Germany, industrial output in the euro area expanded and UK house prices recorded their fastest rise in seven years.
European shares rose to two-and-a-half-month highs on Tuesday, the euro bounced back and German government bonds came under pressure following the German ZEW figures, as investors favoured riskier assets at the expense of safe-haven German Bunds.
Shares were on the rise, with stock markets in Europe and Asia recording strong gains on Tuesday. Demand for riskier assets was also boosted by a Japanese newspaper report, which said the Japanese Government was pondering a corporate-tax cut. This sent the Nikkei more than 2.50 per cent higher on Tuesday.
After hitting a seven-week peak against the dollar last week, the euro started the week under pressure, continuing where it left off on Friday. EUR/USD fell to 1.3277 on Monday, pulling away from its high of 1.3400, reached on Thursday last week. The single currency had attempted a frail recovery back above 1.33 against the greenback following the ZEW data from Germany, but it soon consolidated back below the mark.
The dollar found support and was on course for its first three-day rise since June against a basket of currencies, amid speculation that improving economic data in the United States are building the case for the Federal Reserve to taper its record stimulus programme .
The dollar was lifted ahead of retail sales data from the world’s largest economy, which was expected to paint a brighter picture and give further evidence that the US economy was emerging well from the effects of imposed budget cuts and higher taxes. The print for advance retail sales came out slightly lower than expected but nevertheless were confirmed higher, rising for a fourth consecutive month.
Advance retail sales rose 0.2 per cent in July, from a revised 0.6 per cent the previous month and slightly lower than consensus of 0.3 per cent. EUR/USD fell to 1.3255 following the data, while USD/JPY edged up to 98.24 by the time of writing.
The Japanese yen suffered its deepest slide in nine weeks against the euro, almost a full percentage point, and more than 1.25 per cent against the greenback. The Nipponese currency was weighed by investors’ renewed appetite for risk and after data showed machinery orders declined, giving scope for more central bank easing.
Last week, ending weeks of speculation, the Bank of England announced forward guidance on its monetary policy decision and declared its intention to link future interest rate hikes to the unemployment rate. Governor Mark Carney said the central bank’s benchmark rate will remain at a record low 0.50 per cent until the jobless rate falls to 7 per cent. The pound has since rallied against its major rivals, edging closer to a one-month peak versus the single currency and a six-week high against the greenback. Cable got a bout of strength from recently-published data which confirmed the UK’s economy was on the path to recovery. Analysts are now starting to forecast the jobless rate reaching the 7 per cent threshold sooner than the BoE anticipated, which should prompt policy-makers to consider raising the key interest rate.
GBP/USD traded as high as 1.5574 last week before retreating to 1.5435 on Tuesday, while EUR/GBP fell to 0.8580 after hitting a five-month high by 0.8769 earlier this month. Investor focus will now turn to key employment and inflation reports to gauge future policy moves, but more importantly focus will turn to the minutes from the last Bank of England monetary policy meeting.
Commodity prices traded higher at the start of the week, with spot gold surging more than 2 per cent and silver breaking out of a long-term bearish trend. Precious metals have been under pressure for most of the year with gold dropping more than 20 per cent year-to-date, as investors have eyed scaling back of stimulus by central banks, specifically the US Fed.
Upcoming FX key events: Today: UK retail sales, US weekly jobless claims and US CPI. Tomorrow: EZ CPI & US Michigan consumer sentiment.
Technical key points: EUR/USD is bearish, target 1.2800, key reversal point 1.3450. EUR/GBP is neutral. USD/JPY is bullish, target 105.60, key reversal point 92.50. GBP/USD is bearish, target 1.4670, key reversal point 1.5500. USD/CHF is bullish, target 0.9900, key reversal point 0.9100. AUD/USD is bearish, target 0.8760 key reversal point 0.9520. NZD/USD is neutral.
RTFX Ltd is licensed to conduct investment services business by the MFSA. This information does not constitute advice, should not be relied on as such to enter into a transaction or for any investment decision and is provided for information purposes only.
Emman Xuereb is a trader at RTFX Ltd.