Improving sentiment within European countries this week had quite a positive knock-on effect on the Euro, while signs of weaknesses from U.S. economy have also played a major role in weakening the dollar and empowering the block’s single currency.
The single currency surged on the sentiments and rebounded to a 14-month high against the dollar this week capping its best month in over a year as signs that the euro-zone economic downturn is bottoming out are gaining momentum, setting the euro on a bullish journey with suppressed debt fears for the time being.
Last Wednesday, the euro decisively broke above the 1.35 level for the first time since 2011, as greenback remained weak amid data released from U.S. which showed an unexpected 0.1% GDP contraction in the fourth quarter, marking the most since the second quarter of 2009, raising concerns regarding U.S. recovery.
Following the weak growth figures, the Federal Open Market Committee decided to maintain its monetary policy unchanged with rate at its lowest levels between 0.00 and 0.25 percent as expected. The Fed announced it will maintain its accommodative policy which included sticking to asset purchases program worth 85 billion till the labor market shows improvement.
The pressure on the dollar from the Fed and the weak data only added to the euro’s gains, which was also backed by upbeat figures from the euro economy.
The euro area released better than expected confidence in January, where Economic Sentiment Index unexpectedly rose by 1.4 points in the euro area to 89.2 in January.
The renewed confidence came despite data that showed Spains recession deepened more than economists forecast in the fourth quarter as the governments struggle to rein in the euro zone’s second-largest budget deficit weighed on domestic demand. The starting alarms to warn of the needed correction for the euro, and more alarming that the rally might not be sustained on logical positioning and risk assessment from investors that are rapidly dumping the dollar!
German retail sales also plunged to a 19-month low, dropping 1.7 percent on a monthly basis, the worst since May 2011, while it fell 4.7 percent in annual basis to the lowest since May 2009. However, losses were limited due to solid German jobs data and a drop in the unemployment rate, German unemployment unexpectedly fell in January down to 6.8 percent.
Data released on Friday showed that euro area unemployment remained unchanged at 11.7 percent from the revised previous, beating expectations for a rise to a fresh record high of 11.9%. However, the block is still expressing the weakness of the labor market amid the high termination rates by employers to lower costs and achieve profitability.
Euro area’s Purchasing Managers’ Index (PMI) confirmed that the downturn in manufacturing in the 17-nation bloc is slowing and helped boost the euro further as they indicate that the euro-zone economic recovery is gaining additional momentum.
Other data released Friday from the euro area showed that inflation retreated to 2.0% from a prior of 2.2%, according to CPI flash estimate for the year ended January. Inflation pressures are under control for now and that is certain relief for the ECB which this week is set to hold onto its monetary policy unchanged, knowing that now the bank has even more room to maneuver and focus on growth!
It’s obvious that the Euro zone for now is not the main concern as much as the United States, especially as investors started to feel that leaders did take their part in easing the debt crisis. The U.S., however, is providing fresh concerns not only did the U.S. economy contract unexpectedly in the fourth quarter of last year but the country’s labor sector is further deteriorating and the debt ceiling is a lingering problem that is yet to show its pressure on the market!
U.S. Unemployment rate ticked higher to 7.9 percent from 7.8 percent, while the labor sector adds 157,000 jobs in January down from revised 196,000 and below forecasts.
Despite positive signs from Euro area the rally is still built on sand unless sustained by ongoing signs of recovery. We are not out of the woods and the rally is rapid which increases the chances for the correction this week with the ECB decision and the EU Summit that will have its pressure on the euro help unload some negative momentum, but it is safe to say that for now the risk balance is readjusting and the euro is reclaiming lost status after investors read too much into a euro collapse that now is clear not to be a reality!