Euro Pops as Inflation Does Not Drop

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Market Drivers for April 30 2014

BOJ maintains QE target USD/JPY slips below 102.50

GE labor data better at -25K vs. -10K eyed EU CPI

Nikkei 0.11% Europe -0.24%

Oil $100/bbl

Gold $1290/oz.

Europe and Asia:

JPY BOJ Maintains QE targets

EUR GE unemployment -25K vs. -10K


North America:


USD GDP 08:30 AM

USD Chicago PMI 9:45 AM



The EUR/USD rose above the 1.3800 level after being down most of the session when the EZ flash CPI estimate revealed deflation in the region may be receding. The EZ flash CPI for April rose by 0.7% – this was lower than the 0.8% consensus forecast but still better than the 0.5% reading in the month of March.

Although the CPI readings were slightly lower than forecast, they nevertheless were higher than the month prior and currency traders took comfort in the fact that the rate of change in price levels was positive. The higher CPI readings make it almost certain that the ECB will not change policy at it monthly meeting a week from Thursday, preferring to wait another month.

We have noted in the past the ECB has no good options with respect to further easing actions. A move towards negative rates would almost certainly raise the ire of the regions retail savers that could see the absolute value of their funds decline. A QE program to purchase asset backed securities would simply be too small given the market’s current size. Finally any attempt to buy US Treasury bonds is simply seen as politically untenable.

Therefore the best that ECB officials could hope for is that price levels begin to rise organically as the European periphery begins to recover. There are some signs that this dynamic is starting to take place as Spain, Italy and even Greece are beginning to see positive growth.

As to Germany, the regions largest and most important economy continues to fire on all engines. The latest German unemployment figures showed a decline of -25K – much better than -10K eyed as the jobless rate remains at record low of 6.7%. As long as German growth continues on pace and inflation data continues to rise, the chance of any imminent ECB action remains miniscule.

After what seems like an interminable period of quiet in the markets, today the event risk calendar is full of data starting with ADP numbers at 12:15 GMT then US GDP and Chicago PMI later in the morning and concluding with FOMC meeting at 18:00 GMT. Markets anticipate another 10 Billion in taper from the Fed, but the ADP and GDP data may be of greater import. The consensus view is that US will generate another 200K new jobs this month. If the forecast proves true the dollar could get a boost, as traders will begin to price in Fed tightening beyond the taper. However if the ADP misses the pressure on the greenback could escalate with markets anticipating a long period of neutral policy from the Fed. With EUR/USD already up on relief rally flows, the pair could extend it move all the way to 1.3900 if the market see the Fed as staying still for a considerable period of time.

Boris Schlossberg
Managing Director

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