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Why euro-zone positive surprises will NOT lift EUR/USD yet

Indicator after indicator, the data flowing out of the euro-zone continues beating expectations. After so many months of gloom, the economic situation could have reached a point where it just couldn’t get worse. And, the weaker euro seen in recent months also played a role and is beginning to being felt.  

Is this enough to lift the euro? Yes, but not so fast. Here are some better than expected numbers, why this is still not the time for a gain in EUR/USD and when it could eventually come.

Some data points:

  • Deflation:  Inflation fell less than expected. Even if it remains in negative territory, it may emerge from negative numbers soon.
  • The unemployment rate that got stuck at 11.5% for months and months began dropping and reached 11.2%. Yes, these levels are still high, and even higher in Spain, where the rate of the fall in unemployment has been the highest.
  • Consumer spending: French consumer spending beat expectations with +0.6% and German retail sales also jumped: 2.9% instead of 0.5% predicted. Are the lower prices leaving more spare cash in consumers’ pockets? And is the lower unemployment rate contributing to this as well? So far,  deflation does not seem to take hold.
  • Money in motion: the ECB’s measures of money in circulation and loans also beat expectations. This means that the actions of the central bank are finally reaching the real economy.

There are more positive figures popping up in the old continent. But let’s return to the original question: is it enough to lift the common currency?

Not so fast.

ECB president Mario Draghi  has worked very hard to send money into the real economy and to send it outside: weaken the euro.  However,  this recovery is very initial and very fragile.

The QE program that begins this month is set to assist the recovery to have a stronger footing. The ECB could  re-commit to keeping loose monetary policy until they are fully convinced that the recovery is stronger: until they see the white in inflation’s eyes – looser than in the US.

And EUR/USD is of course built from two currencies. In the US, data has been a hit or miss, and recently more misses than hits. So shouldn’t that suffice to send the pair higher on USD weakness?

But yet again, the Fed is going in a different direction: tightening. Despite weaker than expected figures in a variety of fields, the key data points look good: employment is growing at a strong pace, and inflation is clearly concentrated in energy prices and does not impact core inflation.

The Fed is still en route to tightening in June.

So,  circling back to the original question,  if not now, when will the  economic recovery help the currency in the euro-zone?

Probably a month or so after the initial US rate hike. While the Fed makes its best efforts to telegraph the rate hike, it will still be an event of historic magnitude. The  build up and the initial response could be a further strengthening of the greenback.

But later on, the improvement of the euro-zone (enjoying the weakness of the euro) could gain enough ground triggering a recovery in prices as well.

And when inflation begins ticking up, speculation about the end of the ECB’s QE will mount. Once that happens, we could see the euro beginning to rise. We expect that to  happen in the second half of  2015.

What do you think?

More:  Get Ready For The Next Leg Lower In EUR/USD Coming Weeks

Yohay Elam

Yohay Elam

Yohay Elam: Founder, Writer and Editor I have been into forex trading for over 5 years, and I share the experience that I have and the knowledge that I've accumulated. After taking a short course about forex. Like many forex traders, I've earned a significant share of my knowledge the hard way. Macroeconomics, the impact of news on the ever-moving currency markets and trading psychology have always fascinated me. Before founding Forex Crunch, I've worked as a programmer in various hi-tech companies. I have a B. Sc. in Computer Science from Ben Gurion University. Given this background, forex software has a relatively bigger share in the posts.