Surprisingly good Q2 GDP data from Germany and then France lifted the EUR right at the start of the European session.
Both countries managed to grow by 0.3% q/q in Q2 shaking off median expectations of contraction in both economies. Germany's economy was lifted by domestic fiscal stimulus which pushed both private and government consumption higher in Q2. In addition, net trade made a positive contribution to GDP. EUR/USD jumped to the 1.4270 area on the 6.00 GMT news (the official French data release was pre-empted by an announcement by the Finance Minister), although it then struggled to maintain momentum. The better Eurozone data adds further flavour to the tug of war between USD bulls and bears, with neither getting much traction this summer EUR/USD remains in a familiar range. EUR/USD1.4430 is likely to be key psychological resistance.
The good news from France and Germany later translated into a better than expected Q2 GDP release for the Eurozone which contracted by a modest -0.1% q/q dragged down by a poor performance in countries such as Italy (-0.5% q/q) and the Netherlands (-0.9% q/q). The morning also brought the release of the monthly report from the ECB. The tone of this report was very similar to the speech from ECB President Trichet following last week's ECB policy meeting. But the better data today increases the credibility of the ECB's predictions that the present undershoot of inflation (at -0.6% y/y) will be a temporary. It also undermines criticism that the ECB has not acted sufficiently in offsetting recession in the region. That said, the outlook for growth remains fragile particularly faced with the fact government fiscal incentives will not last indefinitely and given Germany's precarious position in having a heavy reliance on export markets.
The good data from the Eurozone this morning strengthened the modest overnight bias towards risk. AUD/JPY had been edging higher into the London open and these gains stretched as far at 81.20 this morning before sellers emerged. Going into the US open, the JPY is lower across the board. Stock markets are higher.
There was no UK data released this morning. Sterling has climbed vs the USD and the JPY on the generally improved outlook to growth and the widespread acknowledgement that BoE Governor King did not bring any fresh gloom into the public eye with the release of the Inflation Report yesterday. The performance of EUR/GBP has been choppy. On balance, GBP has managed to push to better levels though EUR/GBP 0.8600 is acting as support.
This afternoon key focus is the US retail sales data. Initial claims are also due.
