Fundamental Report – April 18, 2013: Euro Moves Higher Despite Weak German Consumer Confidence

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The EUR/USD continues to move higher, even with German consumer confidence surveys coming in weaker than market expectations. Part of the reason for the continued weekly strength in the Euro is coming from the latest core inflation report for the Eurozone, which came in higher than analyst expectations. This essentially suggests that the quantitative easing measures taken by the ECB have started to put upward pressure on consumer prices. Longer term, this implies that the ECB will be forced to raise interest rates and this is a bullish scenario for the EUR/USD.

For the most part, the Euro has managed to carve out a foothold above 1.30 and it is starting to appear as though a yearly bottom is now in place. In order to reverse this bias, we would need to see some significant (negative) developments for the region’s debt situation. At the moment, this looks unlikely given the structured agreements that have been constructed with respect to a bailout plan for Cyprus.

Inflationary Pressures Matched in the UK

The latest moves in Eurozone core inflation numbers are being matched in the UK. as well. The Bank of England has implemented quantitative easing programs of its own, and it is now becoming clear that the increases in consumer inflation that are commonly expected after stimulus programs have started to come to fruition. This is bullish for currencies and bearish for stock markets, as it essentially suggests that these stimulus programs will not be able to run indefinitely. As a result, the GBP is also higher on the week and is now trading firmly above the 1.53 level.

For the remainder of the week, the main story for forex markets will actually come with corporate earnings numbers out of the US. A negative performance here will weigh heavily on high yielding currencies (such as the AUD and NZD) and on risk currencies (like the Euro). This is largely because of the high correlation between the stock markets and these currencies. Conversely, a positive set of earnings results will likely weigh heavily on the USD and JPY, as investors are encouraged to re-enter carry trades in anticipation of a return to the yearly uptrend. The earnings calendar is packed for the remainder of the week, so volatility is likely to be seen in all trading markets.

 

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