- German IFO suggests higher economic growth
- Interest rate market can be no longer a driver for EURUSD
- EURUSD could continue its bullish trend
Sentiment among German businesses is pretty rosy as it was proved by yesterday’s IFO release. Those upbeat moods can be seen in remarks delivered by the ECB including today’s appearance of President Mario Draghi. Although, there has been no a clear rebound in economic growth yet, a recent rally registered in IFO could herald such shift in GDP.
Needles to say, that recovery in the Eurozone is becoming broader and broader, and on that account some have already argued that the ECB should adjust its rhetoric with regard to ongoing massive stimulus being in place. However, while Draghi underlines an improvement across EMU he also reiterates that there is no time to take out accomodative monetary policy at this stage. What’s the reason behind it?
The German IFO has been increasing since the beginning of this year, and on that account one could assume German growth to accelerate going forward. Source: Bloomberg
It’s all about sustainability in inflation trends. Draghi puts immense emphasis on so-called self-sustaining inflation trend which has not been seen as of yet. For that reason, monetary policy has to remain in an ongoing mode in upcoming months barring an unexpected durable increase in inflation. One could assume that without a significant rebound in inflation there will be no incentive for the ECB’s Governing Council to strike more hawkish tone.
At this stage it’s worth recalling that German inflation figures are scheduled to be releases on Thursday. The reading will be followed by HICP for EMU one day later. Expectations point to weaker figures both for headline and core gauges in annual basis. If there was a turnaround in inflation trends across the Eurozone it could force the ECB to change its mind, however it’s not a base scenario as of now.
German inflation should be scrutinized by investors as this aspect seems to be the most important in Draghi’s eyes at this stage. Source: xStation5
All in all, it’s unlikely that inflation in EMU will rebound in June. Nonetheless, looking at today’s speech delivered by Draghi one could suppose that market participants are tilted to more upbeat outlook for the European economy, even as Draghi stands pat that there is no need to tighten policy. Such bright prospect for EMU props up the euro which has already gained a foothold at around 1.11.
Having said that, while the net long positioning on the EUR was trimmed to some extent in the last week, there is still room to take down some of longs. Moreover, the interest rate market favors constantly declines on the EURUSD, however there is a possibility that spread to come up towards the currency pair not the other way around on the back of rising anticipations of higher rates in the Eurozone (concurrently, a steeper path of rates in the US could be already priced in).
The EURUSD is approaching the key resistance on a weekly time frame. If bulls broke it through, it would be a sign of a trend continuation. Source: xStation5
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