Euro Choppy As Risk Appetite Wanes, Producer Prices Fall To Record Low

The Euro continues to consolidate its gains from yesterday as we are seeing a pull back in risk appetite. Lower European equity markets are weighing on the single currency, which has kept the EUR/USD trading around the 1.4400 price level.

Talking Points
• Japanese Yen: Finding Support On Risk Aversion
• Pound: Construction Activity Jumps
• Euro: Producer Prices Fall to Record Low
• US Dollar: Personal Spending , Income On Tap

Euro Choppy As Risk Appetite Wanes, Producer Prices Fall To Record Low

The Euro continues to consolidate its gains from yesterday as we are seeing a pull back in risk appetite. Lower European equity markets are weighing on the single currency, which has kept the EUR/USD trading around the 1.4400 price level. Euro-Zone producer prices falling to a record low of -6.6% on a yearly basis could raise concerns of further measures from the ECB and add to the heavy trading. However, a 0.3% price increase in June could ease concerns as it may be signaling an end to deflationary pressures.

The first monthly gain in producer prices since July, 2008 will have a major influence over the ECB’s decision on whether to add to their covered bond purchase program. The central bank has maintained that deflation is no longer a concern as they expect that emerging growth and rising energy costs will bring prices back to their target rate of 2.0%. Indeed, energy costs rose 1.4%during the month but still remain 15% lower from a year ago which dragged the annual rate to its record low. The central bank has only exercised 4 billion of its 60 billion purchase program signaling that the bank will refrain from adding to it as it maintains its measured approach. However, Euro-Zone banks continue to tighten lending standards and their deposits remain at elevated levels. The EUR/USD still appears to have potential to reach 1.4613-61.8% Fibo of 1.6037-1.2325

The pound has seen choppy price action after testing 1.7000 despite a jump in construction activity. The Construction PMI reading rose to 47.0 from 44.5 adding to signs that the economy is stabilizing. Indeed, we saw the manufacturing sector move into expansion which should keep the BoE from adding to their asset purchase program at Thursday policy meeting. The crowd is starting to jump on the sterling bandwagon which could see the GBP/USD look to test 1.7332 the 50.0% Fibo of 2.1168-1.3503, but could see a sharp reversal thereafter.

The dollar started to firm overnight as we are seeing profit taking after yesterday’s rally in equities and commodities but has failed to generate consistent support. Markets appear to be taking a breather ahead of the significant event risk to close the week including European interest rate decisions and US non-farm payrolls. Personal spending and income data today could spark volatility as a dearth of consumer consumption is the dark cloud over a potential recovery. An expected 0.2% increases in personal spending will ease some concerns but the forecasted 1.0% decline in personal income will cast doubt on its sustainability. The concerns remain that the mounting job losses will ultimately lead consumers to continue to retrench which would jeopardize future growth once government spending abates. Although we are expecting Friday’s employment report to show job losses easing to 325K from 467K, the unemployment rate is forecasted to rise to 9.6%.

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To discuss this report contact John Rivera, Currency Analyst: jrivera@fxcm.com