The common currency jumped 0.73% against the greenback on Tuesday, encouraged by the positive data on the euro zone economy, making a logical conclusion after the consolidation of long positions near the level of 1.10. A streak of upbeat readings has been released by the European Bureau of Statistics including a seasonally adjusted GDP across the bloc, trade balance, Italian GDP, as well as the ZEW’s economic expectations index, which indicated a stable rebound in the 19-nation union. The positive statistics are expected to free ECB’s hands which have been held in a liquidity trap for a long time.
The quarterly GDP growth in Europe and especially in Italy amounted to 1.7% and 0.8% respectively in the annual terms, tallying with the forecasts. The trade balance exceeded expectations, but the economic expectations deteriorated, with a key reading at 20.6 points of the 22 point forecast. It should be noted that the further pickup in the Oil market, because of the extension of OPEC pact, could be the rescue boat to all the countries struggling with deflation or zero inflation. In spite of, the fact that Draghi pointed towards the slow growth rates of the core inflation in his previous meeting, a steady restoration of the Oil market could undoubtedly promote the growth of prices across the entire range of consumer goods.
Also, I would note that Euro’s recovery was unimpeded, no significant corrections were observed at both the 1.10 and 1.1050 level. Perhaps this is due to the fact, that the number of short positions on the Euro have declined significantly. The reduced trading activity rules out the possibly rapid advances of the European currency. This is confirmed by the CFTC data when short Euro positions entered the positive territory for the first time since May 2014, increasing to +22.4K contracts. It is a likely scenario that the Euro will hold its rally, but you should pay attention to the possible pullback at 1.11 level.
The cheap Pound keeps fuelling the inflation in the UK shows the latest data in consumer prices. In April, core inflation was at 2.4% with a forecast of 2.3%. This could cause concerns for the Bank of England, which has among its objectives to control the price levels and pursue the target level of 2% in the long run. The Pound responded with the sharp drop, as the widening gap between prices and wage growth overshadows the prospects of an economic growth in the country and increases the chances for soft policy conditions by the central bank. Fears are also caused by stagnation in the real estate market, where the price increase in April in annual terms was 4.1% with a forecast of 5.3%, indicating a drop in the demand. GBP/USD advance is an unlikely scenario, however, the forthcoming parliamentary elections in the UK may well become the catalyst for growth. The trader’s attention will be focused on the output data, the labour market and wages growth data and, especially the PMI data.