Euro May Rise as ECB Stimulus Bets Recede, US Dollar at Risk

The Euro may rise as German CPI data and an EU policy shift away from austerity limit scope for ECB stimulus. The US Dollar may fall on dovish Fed-speak.

Talking Points

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  Euro May Rise on German CPI, EU Economic Policy Recommendations Set
  


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  US Dollar at Risk if Fed’s Rosengren Pours Cold Water on QE3 Reduction Bets
  

Currency markets face a busy calendar of fundamental event risk in European trading hours. The preliminary set of May’s German CPI data is set to show the year-on-year inflation rate rose to 1.3 percent, marking the first increase in five months. This may foreshadow a pickup in the region-wide price growth print due later in the week, which could prove supportive for the Euro as traders downgrade expectations for a near-term expansion of ECB easing efforts.

Meanwhile, the European Commission will release its annual set of economic policy recommendations for all EU member states, which ought to reorient officials’ efforts away from budget consolidation and toward battling recession. A more supportive posture from the fiscal side of the policy spectrum ought to reduce the burden on monetary authorities to do more to promote recovery. This too may be seen as reducing scope for ECB accommodation and encourage the single currency higher.

Germany’s Unemployment report rounds out the docket and is forecast to show the economy shed 5,000 jobs in May. A print in line with the consensus will fall broadly in step with the 12-month trend average and should thereby offer traders little in terms of paradigm-changing information. That means that absent a major deviation from expectations, the figures’ singular impact on price action should be limited.

Later in the day, the spotlight will turn to a speech from the Federal Reserve’s Eric Rosengren, who is scheduled to discuss the outlook for the US economy and take questions. Mr. Rosengren is a voting member of the rate-setting FOMC committee this year and traders will no doubt be keen to get his take on the probability of a cut-back in Fed asset purchases over the near term. Given the Boston Fed President’s dovish credentials, there seems to be distinct possibility that his comments may pour cold water on calls QE3 reduction bets and weigh on the US Dollar.

The Australian Dollar underperformed in overnight trade, dropping as much as 0.8 percent on average against its leading counterparts and hitting the lowest level since October 2011 against its US namesake. The move tracked continued deterioration in the Australia-US 10-year bond yield spread – which sank to the lowest level since November 2008 – after firm US Consumer Confidence data added fuel to Fed QE decrease speculation.

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— Written by Ilya Spivak, Currency Strategist for Dailyfx.com

To contact Ilya, e-mail ispivak@dailyfx.com. Follow Ilya on Twitter at @IlyaSpivak

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Euro May Rise as ECB Stimulus Bets Recede, US Dollar at Risk