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Eurozone GDP misses expectations, weighing on the euro

Eurozone gross domestic product came in below market expectations in the first quarter, putting pressure on the euro. Here are the key levels to watch for the euro-dollar exchange rate.

Euros
Source: Bloomberg

The Euro Area has reported Gross Domestic Product (GDP) growth for the first quarter of 0.5%, marginally short of economists’ consensus estimates of 0.6% quarter on quarter. Annual growth was 1.5%, slightly below expectations of 1.5%.

Germany and Spain were among the better performing larger Eurozone economies, with 0.7% and 0.8% growth quarter-on-quarter, respectively. Greece reported the largest economic contraction within the Euro Area of 0.4% quarter-on-quarter.

Summary of first quarter 2016 GDP for the larger Euro Area contributors:

Euro GDP chart

The Euro is down against the dollar following the Eurozone GDP release, with better-than-expected US data in the form of retail and core sales data adding to the pressure. A weekly EUR/USD chart shows the broad trading range of the currency pair between 1.0470 and 1.1642.

As noted by the Wall Street Journal, the top end of this range appears to be capped by dovish sentiment from European Central bank (ECB) members whose comments appear strategically synchronised to euro strength of around 1.15 to the greenback. Three such comments and their short-term reactions are labelled on the chart below.

Euro ECB chart

Fundamentally, we believe a continuation of monetary tightening will eventually commence in the US, although perhaps only in the third or fourth quarter of 2016. With the ECB committed to loose monetary policy, it places the region on the opposite end of an interest rate cycle and supports the case of dollar strength and Euro weakness.

The trading or technical perspective appears to reflect the basic underlying fundamental case (supported by ECB member actions). The currency pair is currently reversing off the resistance of the trading range (1.1510) suggesting a resumption of euro weakness/ dollar strength from current overbought levels with a medium-term support target considered at around 1.0800. The current trading range habit of the currency pair would be considered to have changed (or rather failed) should EUR/USD instead start to rally once again and trade firmly above the 1.1642 level on a weekly close.

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