Eurozone Economy Grew 0.2% in 1Q; France Stagnates, Germany Avoids Recession

The Eurozone economy grew by 0.2% in the first three months of the year, but its post-pandemic growth weakened sharply toward the end of the period under pressure from the war in Ukraine and record-high inflation.

Eurostat's figures, released on Friday, mean that gross domestic product was up 5.0% from a year earlier, a time when the region's economy was still laboring under the worst of the effects from the pandemic. 

Both figures were largely in line with expectations, but masked some big divergences from consensus among some of the region's biggest member states. French GDP undershot expectations to stagnate in the quarter, while German GDP rose 0.2%, defying fears that it would register a second straight quarter of negative growth, thanks to strong investment spending.

At the same time, Eurostat said that inflation in the Eurozone hit a new record high since the creation of the single currency. Consumer prices rose 7.5% in April, up from 7.4% in March. While the slower rise in the headline rate suggests that an absolute peak for inflation may be near, underlying price pressures remained strong: core CPI rose by over 1% for the second month running, and Eurostat's harmonized measure of annual inflation excluding food and energy accelerated far more than forecast to 3.9% from 3.2% last month.

The euro rose by around half a cent against the dollar in the course of the morning as national GDP data were published in advance of the Eurozone numbers. By 5:20 AM ET (0920 GMT), it was at $1.0576, up 0.8% on the day. A bounce in Chinese assets in response to promises of more economic policy support from Beijing had also helped sentiment toward the euro and to risk assets more broadly.

Want to direct talk with our market experts?

CONTACT NOW: MONEY LIFE RESEARCH

Dollar Gains to Two-Year High on Safe Haven Flows

The U.S. dollar posted further gains in early European trade Wednesday, trading at two-year highs on safe haven flows as traders digested slowing global growth, raised geopolitical tensions, and the prospect of more tightening by the Federal Reserve.

At 3:15 AM ET (0715 GMT), the Dollar Index, which tracks the greenback against a basket of six other currencies, traded 0.2% higher at 102.532, the strongest it has been since March 2020 and on course for its best month since 2015.

Russia announced plans to halt gas flows to Poland and Bulgaria from Wednesday amid a standoff over fuel payments, to the benefit of the safe haven dollar.

Russian President Vladimir Putin has decreed that payment from “unfriendly” buyers should be in rubles, helping support his country’s beleaguered currency, while the European Union has responded that would be a breach of sanctions.

This escalation of tensions has added to the reasons traders have chosen to hold the dollar, with strict COVID-19 lockdown in China likely to hit economic growth in the world’s second largest economy while the Federal Reserve is expected to hike interest rates by 50 basis points in May as it seeks to combat inflation at a four-decade high.

EUR/USD fell 0.2% to 1.0618, dropping to a five-year low, amid fears for Europe's energy security, while the weak GfK German consumer confidence index, projected to plunge to a historic low in May, also weighed.

“April has been nasty for the euro, falling over 300 points. The Ukraine war and the hawkish Fed have been a toxic mix for the euro, as investors have dumped the currency and flocked to the safe-haven U.S. dollar,” said Kenny Fisher, an analyst at brokerage OANDA.

USD/JPY rose 0.5% to 127.81, not far removed from its recent 20-year low with the Bank of Japan set to meet overnight.

This central bank has maintained a very accommodative monetary stance, in direct contrast to the hawkish Federal Reserve, but traders see the risk of policy changes to try and arrest the currency's recent weakness.

GBP/USD edged higher to 1.2577, falling to a fresh 21-month low as last week’s weak retail sales data prompted a rethink of the Bank of England’s tightening cycle.

“Tightening expectations for the 5 May BoE meeting have dropped backed to 29bp from 38bp early last week,” said analysts at ING, in a note.

USD/CNY edged lower to 6.5555, with the yuan helped by data showing Chinese industrial profit growth quickened in March, while AUD/USD rose 0.5% to 0.7159 after Australian consumer prices surged at their fastest annual pace in two decades, spurring rate hike speculation.

WANT TO DIRECT TALK OUR MARKET EXPERT ?

CONTACT: MONEY LIFE RESEARCH

Dollar riding high after index hits 100 for first time in nearly two years

The U.S. dollar index strengthened to 100 for the first time in nearly two years on Friday, supported by the prospect of a more aggressive pace of Federal Reserve interest rate hikes.

The greenback has gained ground on a basket of rivals over the past month, particularly against the euro, which has been pressured by investor concerns about the economic costs of war in Ukraine and a potentially nail-biting election in France.

The dollar index rose as high as 100 in early European trading hours, its best level since May 2020. It later lost some momentum and was last broadly flat at 99.844.

The index is up 1.3% this week, which would be its biggest increase in a month, backed by hawkish remarks from several Federal Reserve policy makers who are calling for a faster pace of interest rate increases to curb rapid inflation.

This week's release of the minutes of the Fed's March meeting showed "many" participants were prepared to raise interest rates in 50-basis-point increments in coming months.

On the other side of the dollar's rally, the euro dropped to a new one-month low of $1.0848. It later recovered and was last broadly flat on the day at $1.08770.

Meeting minutes from the European Central Bank published on Thursday suggested its policy makers are keen to act to combat inflation, but the eurozone has so far taken a more cautious tack than other central banks, weakening the euro.

A tightening election race in France between president Emmanuel Macron and far-right candidate Marine Le Pen has added to pressure on the euro, raising investor concerns about the future direction of the euro zone's second-biggest economy, though Macron is still ahead in polls.

"The upcoming French presidential election, with the first round on Sunday, is also adding to current negative EUR sentiment," currency analysts at MUFG said in a note.

The dollar extended its gains against the Japanese yen, hitting 124.23, its highest in over a week and approaching last month's near seven-year high of 125.1.

The yen has steadied this month after tumbling in March, but remains under pressure as the U.S. raises interest rates and the Bank of Japan intervenes in the bond market to keep rates low.

Sterling lost ground versus the dollar, and was last down a quarter of a percent at $1.30400.

In cryptocurrency markets, bitcoin was broadly unchanged at $43,430.

WANT TO DIRECT TALK OUR MARKET EXPERT CONTACT : MONEY LIFE RESEARCH

GBP/JPY consolidates in a range around 162.00 mark, downside remains cushioned

GBP/JPY struggled to capitalize on its modest intraday gains back closer to over a one-week high.

The cautious market mood underpinned the safe-haven JPY and capped the upside for the cross.

Subdued USD demand benefitted the GBP and extended some support, at least for the time being.

The GBP/JPY cross surrendered its modest intraday gains and was last seen trading in the neutral territory, around the 161.80-161.75 region.

The cross attracted some dip-buying near the 161.40 area on Thursday and climbed back closer to over a one-week high touched the previous day, though the uptick lacked bullish conviction. The European equity markets recovered from the overnight selloff, which undermined the safe-haven Japanese yen and extended some support to the GBP/JPY cross.

Apart from this, comments from Bank of Japan board member Asahi Noguchi, saying that the central bank must stick to its ultra-easy policy despite rising inflationary pressures, also weighed on the JPY. On the other hand, some cross-driven strength stemming from the fall in the EUR/GBP cross benefitted sterling amid subdued US dollar price action.

The combination of factors did provide an intraday lift to the GBP/JPY cross, through the prevalent cautious market mood kept a lid on any meaningful upside, at least for the time being. The market sentiment remains fragile amid fading hopes for a diplomatic solution to end the war in Ukraine and the prospect of more Western sanctions on Russia.

Hence, the focus will remain on new developments surrounding the Russia-Ukraine saga amid absent relevant market moving economic releases from the UK on Thursday. The incoming geopolitical headlines would influence the risk sentiment, which, in turn, will drive demand for safe-haven assets, including the JPY, and provide impetus to the GBP/JPY cross.

WANT TO DIRECT TALK OUR MARKET EXPERT CONTACT: MONEY LIFE RESEARCH