EUR/USD Feels The Pressure as EZ Growth Disappoints

Market Drivers May 15, 2014

EUR drops to 1.3660 as weak GDP, lower CPI forecasts weigh
Spanish newspaper reports that ECB will cut deposit rates to -25bps
Nikkei -0.75% Europe -.35%
Oil $101/bbl
Gold $1305/oz.

Europe and Asia:

JPY GDP 1.5% vs. 1.0%
EUR French GDP 0.0% vs. 0.4%
EUR German GDP 0.8% vs, 0.7%
EUR CPI 0.7%% vs. 0.7%%
EUR GDP 0.2% vs. 0.4%%

North America:

USD CPI 8:30 AM
USD Unemployment Claims 8:30 AM
USD Empire Manufacturing 8:30
USD Philly Fed 10:00

The euro came saw another round of selling in early European session today as weaker than expected GDP figure, lower CPI forecasts and report of a possible ECB rate cut in June all weighed on the unit as the session wore on.

The EZ GDP for Q1 missed its mark badly printing at 0.2% versus 0.4% eyed as the economic polarization between Germany and the rest of Europe intensified. German GDP actually beat the forecasts printing at 0.8% versus 0.7% projected, but French GDP showed no growth at all 0.0% vs. 0.4% expected and Spanish and Italian GDPs actually contracted.

The sharp difference between German performance and the rest of the EZ served to highlight the structural challenges in the region where growth is very unevenly divided and created a sense of urgency for further stimulus from the ECB. To that point a report in Spanish newspaper La Vanguardia suggested that the ECB will cut its deposit rate to -25bps at the next meeting in June and will also lower the lending rate to 15bps.

Lastly the EZ CPI readings remain extremely low with core inflation coming only at 0.7% well below the ECB's target rate of 2.0%. With price levels clearly stuck near deflationary levels the ECB is now likely to act in June and currency markets are beginning to price in this easing.

The EUR/USD fell all the way to 1.3659 in morning London dealing as it absorbed the fresh round of negative news, but the pair has held above the 1.3650 support partly because the dollar remains relatively weak. US rates remain mired near the 2.50% level with benchmark 10 year yielding 2.54% this morning. With fixed income investors worried about the slowdown in US activity, the downward drift in the euro is tempered by lack of appetite for dollar assets as US yields continue to decline.

Today, in North American session the market will get a look at the CPI data, but the key focus will be on Empire Manufacturing, Philly Fed and Industrial Production as trader look for any clues in pick up in activity. The expectations are mixed with markets looking for Empire to improve and Philly to decline, but if the data comes out unambiguously positive it would prove to be a catalyst for a more sustained dollar rally and could send EUR/USD towards the 1.3600 figure.