Stagnant EU growth, alongside weak German ZEW Survey, lead to additional calls for further ECB stimulus

The fallout from ECB President, Mario Draghi’s explicit threat that the European Central Bank may add further stimulus in June was very much apparent in the currency markets, with the EURUSD continuing to be sold. Despite Draghi inspiring the EURUSD to depreciate by over 200 pips last week, after stating that if inflation levels continue to disappoint, the ECB would be “comfortable” acting in June, it was other economic data which raised eyebrows.

Last Tuesday, Germany’s ZEW Economic Sentiment recorded its lowest reading since January 2013. The ZEW Survey scored a 33.1, far below the 40.0 expectation. Bearing in mind Germany’s own GDP correlates to nearly 30% of the EU economy, this alone woke up the bears. Further dismay was caused when a preliminary EU GDP report suggested that EU growth in the past quarter remained unchanged, at 0.2%. It was hoped that the EU economy would display 0.4% expansion. Together with the disappointing German ZEW Survey, this led to further calls for extra ECB stimulus in June. EU CPI (inflation) remained unchanged, at 0.7%. All in all, the EURUSD is currently situated at a three-month low, just below 1.37.

Elsewhere, a dovish Mark Carney inspired traders to sell the GBPUSD. Last Wednesday, during the BoE’s inflation report, Carney emphatically stated that despite UK economic data continually surpassing expectations, the BoE were in “no hurry” to increase their benchmark interest rates.

In previous weeks, a collection of impressive UK economic data had the bulls in full swing, with optimists hoping that the BoE would increase rates in late 2014. Carney made further dovish remarks regarding the UK economy over the weekend, stating that the UK housing sector represents one of the biggest risks to the UK economy, moving forward. It appears that Carney is attempting to talk down the GBP, after it touched a five-year high against the USD the week before. Currently, the GBPUSD is starting to move upwards, after reaching its lowest valuation in two months.  

In regards to the Asian markets, during the previous week, the JPY surprisingly strengthened. Japan’s latest GDP release showed that during the previous quarter, Japan’s economy expanded at is fastest pace in nearly three years. Overall, Japan’s economy expanded by 1.5%, far beyond the 1% expectation. Consumer expenditure showed a noticeable improvement, with consumers being enticed to make purchases, before the Japanese government imposed a new sales tax in April.

The week ahead sees a variation of Japanese economic data released between the 19^th - 21^st May. The majority of attention is likely to be directed towards BoJ’s Governor, Kuroda’s live press conference, this upcoming Wednesday. It is hoped that Kuroda will offer some sort of indication on when the BoJ will look to increase their Quantitative Easing program. If Kuroda indicates that further easing could come as soon as next month, then JPY weakness is possible. However, if Kuroda states that the timeframe for further QE has not yet been determined (like in previous months), then additional JPY strength could be forthcoming.

In reference to the USD, confidence remains low in the Greenback, despite US economic data continuing to exemplify improvements. For starters, last week’s Initial Jobless Claims showed the fewest number of American citizens filling applications for unemployment benefits, since 2007.

Last week, only 297,000 Initial Jobless Claims were made, compared to the 325,000 expectation. Additionally, there were signs that the US housing sector is starting to make progress. Compared to last month, Housing Starts improved by 13% and Building Permits by 8%. Recently, the Federal Reserve had expressed that a noticeable slowdown in the housing market, was hampering progress to the US economic recovery.  Perhaps more importantly to the Federal Reserve, US CPI (inflation) climbed by 0.3% in April, their fastest CPI improvement in over one year.

Although the majority of US economic data was positive last week, there was some disappointment in regards to consumer expenditure. Advance Retail Sales came in at only 0.1%, quite some distance from the 0.4% expectation. It is widely reported that consumer expenditure represents around 70% of the US economy and this led to some suspicions that US consumer confidence, remains low. Federal Reserve leader, Janet Yellen is expected to give a speech at New York University, this coming Wednesday. Although is not yet known whether Yellen is scheduled to address the US economy, any references made, may provide financial market volatility.

What to Watch this Week:

Over the last week, there was a high quantity of economic data released to the general public. This results in the week ahead, being slightly less heavy on economic releases. However, market eyes will be paying close attention to the release of the Federal Reserve’s FOMC minutes this coming Wednesday. Elsewhere, on Tuesday, the UK’s latest CPI figures are released. Right now, it is expected that below target inflation levels will validate Mark Carney’s assertion last week, that the BoE are in no need to increase interest rates anytime soon.

Written by Jameel Ahmad, Chief Market Analyst at FXTM.

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