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The existential threat posed by Italy to the euro was replaced yesterday by much stronger than expected inflation data from several Eurozone countries, including Germany, Spain and Portugal, suggests Greg Gibbs, Analyst at Amplifying Global FX Capital.

Key Quotes

“Other economic data from the region, including stronger labour market data from Germany, suggest economic activity is likely to stabilise and strengthen from a period of weakness in the first four months of the year.”

“If not for the lingering fear of a crisis in Italy and some political uncertainty in Spain, the CPI data on Wednesday might argue for a significant further rebound in the EUR.   Without the political crisis, the data would support the end of ECB QE in September.”

“The dip in Eurozone core CPI in April is likely to be revealed as an aberration from the trend in the May data released on Thursday.”

“Of course, it is difficult to disentangle the politics from the latest economic data.   The EUR has bounced sharply as the temperature in Italy was turned down.   Italian asset markets also rebounded, probably with some help from ongoing support from the ECB’s Asset Purchase Plan.”

“The latest political news provides a path to a less dramatic outcome, although still with heightened and prolonged uncertainty. At this stage, it is best not to comment too extensively given the fluidity of the situation.”