by Dave Evans of binary.com
Eurozone Limps Over The Line
It was a big week for the Eurozone, with Friday seeing the release of GDP figures that could confirm a triple dip recession. Thankfully the economic came in better than expected…just.
Eurozone Flash GDP rose by 0.2%, slightly more than the forecast of 0.1%. This is largely down to France’s GDP rising by 0.3% as Germany’s GDP limped over the line at 0.1%. There were some strong performances in peripheral markets such as Greece and Spain, with the former expanding by 0.7%.
Markets greeted the news with something approaching indifference, with the euro barely changed against the pound on Friday. Yes the Eurozone avoided a recession, but this matters little when growth is still sluggish in the its core powerhouse Germany. Some analysts also pointed to the fact that French growth could be accounted for by the large increase in government spending and without this, activity would be stagnant at best.
This narrow avoidance of recession could be negative in the long run as it may lull political leaders into thinking their reforms have done enough, when bolder reforms are required if the Eurozone is to keep up with the UK and especially the US. The Germany economy is not exactly staring at the abyss, but neither is it doing a roaring trade.
EUR/ USD daily chart
The EUR/ USD dropped again on Friday, partly due to uninspiring European data. However, the main cause of the downside pressure was more the ongoing strength of the US dollar which was emboldened by stronger than expected retail sales and import prices.
US Dollar Index
Until the US dollar shows signs of reversing its long term up trend, the euro will have limited recovery potential even if the Eurozone continues to creep back towards growth.
Against the yen however, the euro has at least a chance of pushing higher even if the euro itself stands still as the yen continues to weaken on its own accord. Japan recently rocked markets by increasing its asset purchase program at a time when the US and UK are withdrawing theirs and the ECB is still going through the gears. This will have a dilutive effect on the yen, as will planned future pension transactions.
EUR/ JPY daily chart
Therefore a two pronged attack may pay dividends.
Trade 1 EUR/ USD Lower
As a partial hedge for the first trade and an attractive trade in its own right, you could bet that the EUR/ JPY will rise over the same period. These two trades may cancel each other out to an extent, but there’s a very real possibility of both winning and landing the double pay day. Even if the euro weakens from here, the yen itself is potentially even weaker, while the dollar is still looking tough.
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