GBP/EUR 1.2293 (0.8136)
Yesterday saw an unexpected rise in German unemployment for the first time in six months amid signs of a slowdown of Europe’s largest economy. The number of people out of work rose to 2.9 million in May which is a 23,937 rise from May last year and significantly off Economists’ expectations of 15k. German business confidence also decreased this month on concerns that growth will slow as the 18-nation euro area, the Germany’s biggest export market, struggles to sustain its revival. This could weigh on the fragile euro area as ECB executive board member Yves Mersch ramped up the rhetoric stating the ECB will introduce further stimulus at its meeting on June 5 which could yield a combination of policies to tackle low inflation and low credit growth, but the timing of implementation could vary. Measures being prepared by the ECB are likely to include cutting the deposit rate into negative territory – effectively charging banks to hold cash at the ECB overnight – and bank loans to increase lending to smaller companies. Today is a bank holiday at the Eurozone core so will be interesting to see the market’s reaction to yesterday’s data but there should be good degree of Euro related volatility as traders take positions ahead of next week’s meeting.
Yesterday’s dollar theme continues today as we look to preliminary GDP this afternoon in the US where we anticipate a contraction of -0.7% from a previous 0.1%. New and revised data released since the BEA’s (Bureau of Economic Analysis) first estimate of Q1 real GDP growth in April point to a 0.8% downward revision to −0.7%. Revisions to business inventories pointed to less business investment, and core shipments figures suggested less spending on capital equipment in Q1 than originally estimated. Construction spending showed less spending on structures in both private non-residential and state and local government spending. Residential investment is likely to be revised somewhat higher, and consumer spending will reflect upside revisions to retail sales figures. The greater inventory correction in Q1 means a more limited inventory correction in the quarters ahead, which is a positive for Q2 growth.
We saw a further push in EUR/USD this morning to as low as 1.3586 as the cross looks to hold off the break through the 1.36 threshold. As mentioned yesterday if it can hold this we may see a further push towards the next benchmark of 1.3560 and further then towards 1.35. The negative US GDP has been priced into the market but anything slightly more positive could see a push down. Sterling strength has slightly waned and moved back to over .81 levels on the back of a combination of slightly weaker economic data and inklings of nascent political risk to Britain’s long-term status-quo after the European elections.