Euro Pushes Higher As Pandemic Fears Ease and Economic Confidence Improves, Will US GDP Add To Bullish Sentiment?

The euro reached as high as 1.3240 on the back of improving confidence and increasing risk appetite now that fears from the “swine flu” pandemic have eased. Economic confidence in the region improved to 67.2 from 64.7 which was the highest in almost a year.

Talking Points
• Japanese Yen: Weakens As Health Fears Ease
• Pound: Finding Support On Improving Risk Appetite
• Euro: Higher On Improving Economic Confidence
• US Dollar: GDP and FOMC Rate Decision On Tap

Euro Pushes Higher As Pandemic Fears Ease and Economic Confidence Improves, Will US GDP Add To Bullish Sentiment?

The euro reached as high as 1.3240 on the back of improving confidence and increasing risk appetite now that fears from the “swine flu” pandemic have eased. Economic confidence in the region improved to 67.2 from 64.7 which was the highest in almost a year. Government stimulus plans and easing inflation has helped improve consumer’s purchasing power and their outlook. This was evident in the improvement in the Bloomberg retail PMI gauge which rose to 48.4 from 44.1. Although Easter spending helped boost the consumption numbers, there are clear signs that consumers are starting to open up their wallets.

The improving fundamental data will decrease the chances that we will see the ECB embark on quantitative easing measures, as they have been reluctant to take that route. However, we have been receiving conflicting rhetoric from members with Bini Smaghi stating that buying government bonds would be problematic for the central bank. The comments come on the heels of remarks from committee member Nowotny who said that the ECB stands ready to use unconventional measures. Therefore, markets will begin to scrutinize any additional rhetoric the may come from members as the central bank appears to be divided on the issue. Nevertheless, a 25 bps reduction over the next two meetings is very likely but if that is seen as the end of the easing cycle then we could see the Euro start to gain additional support. The EUR/USD has pushed above the 100-Day SMA at 1.3222 but unless we see a clear break of the resistance level, we could see it limit future gains. The April 14th high of 1.3382 is the next level of resistance.

Further evidence of improving risk appetite is the current yen weakness which had been the strongest performing currency during the heightened fears from the health crisis. The dollar/yen has rallied nearly 200 pips from yesterday’s low of 95.62, but the 50-Day SMA at 98.00 is ahead as possible resistance. Meanwhile, the pound has also benefitted from the improving optimism with sterling/dollar breaking above the 20-Day SMA at 1.4739. The pound may continue to find support if we see risk appetite continue as there is very little event risk on the economic docket which could lead to a test of April 16th high 1.5070.

The dollar has been under pressure during overnight trading as markets have started to look past the “swine flu” and bank stress tests and focus on the improving fundamental data. Indeed, yesterday’s jump in consumer confidence was a catalyst to reverse sentiment which has carried through to today as markets prepare for a U.S. GDP report which is expected to show the pace of contraction for the economy has slowed from 6.3% to 4.7%. The slew of stimulus and availability of cheap credit has raised optimism that the economy will regain its footing and return to positive growth by 2010. The FOMC policy decision is also ahead with expectations that the central bank will leave their benchmark rate at 0.25%. However, we could see the Fed announce additional quantitative easing measures or at the very least give an update on the impact of current efforts which will provide potential event risk. A better than expected growth report and an upbeat central bank could add to current risk appetite and dollar weakness.

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To discuss this report contact John Rivera Currency Analyst: jrivera@fxcm.com
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