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.

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:

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.

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.

This information has been prepared by IG, a trading name of IG Markets Limited. In addition to the disclaimer below, the material on this page does not contain a record of our trading prices, or an offer of, or solicitation for, a transaction in any financial instrument. IG accepts no responsibility for any use that may be made of these comments and for any consequences that result. No representation or warranty is given as to the accuracy or completeness of this information. Consequently any person acting on it does so entirely at their own risk. Any research provided does not have regard to the specific investment objectives, financial situation and needs of any specific person who may receive it. It has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such is considered to be a marketing communication. Although we are not specifically constrained from dealing ahead of our recommendations we do not seek to take advantage of them before they are provided to our clients. See full non-independent research disclaimer and quarterly summary.

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