EUR/USD – Positive economic surprises from Eurozone’s core

on Aug 20, 2013
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**iNVEZZ.com, Tuesday 20 August:**

The German PPI for July m/m today reported a decline of 0.1 percent, falling short of economists’ forecasts for growth of 0.2 percent. Analysts were hoping for some positive inflation signs following June’s flat reading as the indicator has been in negative territory since February 2013. Year-on-year the index is up 0.5 percent, disappointing expectations for an acceleration from the prior 0.6 percent to 0.7 percent.

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Finland’s Unemployment Rate for July dropped to 6.8 percent, comfortably beating expectations for a rather modest decline to 7.4 percent from June’s 7.8 percent. This is the lowest jobless rate for the core Eurozone country since November 2011.

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Dutch Consumer Confidence for August beat analysts’ estimates for -35 with a solid reading of -33, well up on the prior period’s -38. It would be intriguing to see the impact on consumer sentiment next month following Moody’s warning yesterday to cut the Netherlands’ bonds rating if the debt keeps on rising.

Analysts from Commerzbank have been asking when the EUR/USD will finally decline. Market observers believe the EUR/USD will decrease this year, but that has not materialized yet with the pair trading roughly flat so far. According to Commerzbank this “is due to uncertainties surrounding the ECB’s forward guidance and the Fed’s tapering plans.” However, once these issues gradually lessen the German bank expects a ‘’significantly lower EUR/USD exchange rate by year-end.’’

!fm[](/uploads/story/4937/43.png)
Commerzbank recognizes that risk premiums for 10-yr Italian and Spanish bonds versus German Bunds have significantly declined and have supported the euro, with the Spain-Germany bond spread the lowest in 2 years. As the Eurozone technically exited recession, the prospects for further rate cuts from the ECB have shrunk considerably. However, the Fed has outlined a strategy of hiking interest rates and will inevitably be the first major central bank to enter the rate-tightening cycle. The Eurozone has delivered some remarkably positive economic surprises to the upside that have outpaced mixed US data. However, there is a danger the market might be overly optimistic for the Euro area outlook and upcoming economic updates may disappoint forecasts that have been regularly revised by analysts to the upside.
!fm[](/uploads/story/4937/ED_Matts2.png)
The charts above illustrates the remarkable similarities between the current EUR/USD market dynamics and those in 2011. The fractal analogy by Ed Matts, Senior Technical Strategist at Capital Management and twitter enthusiast, projects volatile trading for the pair by the end of August followed by a strengthening of the US dollar ahead of the September FOMC meeting.
In the US, Redbook Retail Sales for last week are scheduled at 13.55 BST, with prior growth of 0.4 percent. The indicator measures the change in sales in the 15 biggest supermarkets in America and it’s positively correlated with the general merchandise share of retail sales, which accounts for about 10 percent of the total number.

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Forex: EUR/USD neutral at the moment Forex Afternoon update: Bundesbank comments raise the euro

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