Is this the beginning of the turnaround?

Spain, Italy and France all managed positive growth in Q1 as the Eurozone itself grew by 0.4% QoQ. Italy, long regarded as the weakest of the major economies, grew at 0.2% with Rome declaring the recession “over”.

Analysts believe that the positive first quarter dispels the fear of a recession in the region although it may be some time before growth reaches “acceptable” levels. A raft of other data for both individual economies and the region showed that the green shoots of recovery are forming.

Unemployment improved in Germany, falling by 12K in April leading to a jobless rate of 4.9%. Overall unemployment in the region continues to improve falling to 7.7% last month.

There was no official comment from the ECB but there is sure to be a sense of relief. Inflation data for Spain showed that prices increased by 1% in April compared with 0.4% in March. Mario Draghi has maintained for some time now that inflation would start to pick up and this would be the start of the recovery.

The single currency jumped following the release of the data and a continued correction for the dollar. It reached a high of 1.1230, eventually settling back to close at 1.1214.

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Sterling rally attributed to Brexit but is it just a dollar correction?

The pound rallied to a high of 1.3049, moving back above the important psychological level of 1.3000 for the first time since the Easter holiday. Several analysts attributed the gains to hopes of a breakthrough in talks between the Government and the main opposition Party over Brexit.

The more likely reason was a little more “technical”. Following the better than expected GDP data from the Eurozone which led to a euro rally, the hedging of positions in the dollar index (made up 57.6% by the euro and 11.9% by Sterling) meant that there had to be buying of Sterling which gained momentum on the break of 1.3000

So far, there is still no positive news for Brexit which remains the only significant driver of the currency. Tomorrow’s Bank of England Monetary Policy Meeting has attracted more publicity about there only being one female on the committee than what it may do or say about the economy or interest rates. Rates will be left unchanged and the Governor will talk up recent employment data as a positive for the economy but until Brexit issues are resolved, the Central Bank cannot become involved in the process.

The pound eventually settled back to close at 1.3034 versus the dollar. It did manage to rally versus the single currency as well, following rumours of a Brexit breakthrough but, again, the move was more technically driven as “natural” Sterling buy orders at month end were executed.

Dollar awaits Powell’s pronouncement on the economy

Given the mixed bag of economic data that has been seen recently and the proximity of the April employment report, Fed Chairman Jerome Powell may sound a more cautious note than had been expected following the latest meeting of the FOMC.

Following the GDP data last week, the market had been leaning towards a more bullish speech and a positive indication about rate hikes. Traders have now become resigned to the doubt that the Fed will hike in 2019 given the continued uncertainty about growth and the fact that inflation remains benign.

Weaker than expected Chinese PMI data also dampened enthusiasm for the dollar somewhat. A continued or severe slowdown in China, America’s largest trading partner, will reverberate through the U.S. economy.

There had been rumours earlier about a possible breakthrough in trade talks driven by a story that President Trump had agreed to accept a “softer” than expected pledge from China over cyber theft. This is yet to be confirmed but could be a significant move towards a deal.

The dollar index continued its recent correction, reaching a low of 97.44 before closing at 97.52. The dollar will continue to gyrate until there is a clear path for the U.S. economy and short-term interest rates. Neither are likely to receive too much clarity from Jerome Powell later today.

The April employment report is looming with “guestimates” of between 180k and 200k being the most prominent (as usual). Any major deviation from that range will influence the dollar but will only be short-lived.