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The Euro Rebounds Following FOMC Dovish Minutes and Despite Soft EU Confidence Data

David Becker
Updated

The EUR/USD rebounded following Wednesday’s FOMC meeting minutes which showed that the Fed was willing to let inflation run above their target for a while. The ECB’s Praet said that the slowdown in Europe reflects supply constraints while the ECB Constancio said that the rise in Italian bond yields was a concern. French Business confidence was mixed and German confidence fell.

Technicals

The EUR/USD rebounded near the December lows at 1.1725. A break of this level would lead to a test of the November lows at 1.1550. Resistance is seen near the 10-day moving average at 1.1808. Momentum is negative as the fast stochastic generated a crossover sell signal. The index is printing near the 15, level which is below the oversold trigger level and could foreshadow a correction.

ECB’s Praet says the slowdown reflects supply constraints

ECB’s Praet says the slowdown reflects supply constraints, adding that economic conditions are good despite clouds on the horizon. The comments confirm that the ECB remains on course to end net asset purchases this year, although Praet admitted that risks include a reversal in business confidence. He repeated the ECB’s mantra that more structural reforms are needed and urged once again the completion of the capital market and banking union. On Italy he warned that given high debt levels, there is not much space for domestic demand.

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ECB’s Constancio said the spike in Italian bond yields cause of concern. The Vice President said there “is a spike indeed in Italian 10-year bond yields. Still, not a huge developments but certainly a significant development and a potential cause of concern”. Contagion risks are “not completely off the table, especially if this spike would indeed continue, but so far there are very slight indication in that direction”. So far then a pretty relaxed view on bond market developments although Constancio stressed that it is in Italy’s interest to abide to EU fiscal rules “because we see what are the reactions in the market”.

ECB warns of increased risk-taking in most financial markets

ECB warns of increased risk-taking in most financial markets. The latest Financial Stability report said some markets are becoming more vulnerable and while there is no broad-based misalignment in prices of financial assets there are “pockets of stretched valuation”. and “vulnerabilities are building up in global markets”. Among the key risk factors are concerns about “public and private debt sustainability”, “amid historically high debt levels”. Italy wasn’t mentioned directly, but clearly with the incoming government making expensive promises, this will clearly be an even larger area of concern.

French confidence data mixed

French confidence data mixed. After the disappointing PMI readings yesterday’s today’s French national business confidence readings were mixed. The overall reading declined to 106 from 108 in the previous month, but manufacturing confidence actually held steady at 109, better than Bloomberg consensus. The overall production outlook indicator meanwhile dropped sharply – to a reading of 15 from 23 in the previous month. However, the reading for the own company production outlook actually improved – to 17 from 15. This suggests that while negative headlines weighed on the assessment of the general economic situation, at company level, sentiment is still holding up.

 

German GfK consumer confidence fell

German GfK consumer confidence fell to 10.7 with the advanced reading for June, down from 10.8 in the previous month and the second consecutive dip. The index peaked at 11 in February, but remains at very high levels. Still, the full breakdown for May showed a marked decline in the willingness to buy despite an improvement in income expectations. The willingness to save meanwhile declined. Q1 GDP data today still showed a positive contribution from consumption to overall growth, but the GfK numbers at least signal some slowdown ahead.

UK April retail sales beat expectations

UK April retail sales beat expectations, rising 1.6% month over month in the headline figure, rebounding strongly from the steep, weather-affected 1.1% month over month decline that was seen in March. The median forecast had been for a 1.1% month over month gain. The biggest upside driver on the month was petrol sales, which surged 4.7% month over month, reversing from a sharp 6.9% contraction in March when road closures (due to snow) had affected travel. On the year-on-year comparison, sales rose by 1.4%. The underlying three-month on three-month figure (for February to April) rose by a fractional 0.1%. Online sales as a proportion of all retailing rose 17.3%, the consequences of which are have been playing in the news as many well-known chains downsize on the high street as they orient more to online.

This article was originally posted on FX Empire

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