The euro is strengthening against all major currencies except the US dollar today. The common currency is the currently the strongest against the Japanese yen and the Canadian dollar. Yesterday, the euro strengthened following comments from Bank of France Governor François Villeroy de Galhau. Later in the day, the euro gave up its gains (particularly against USD) thanks to broad dollar strength.
Looking more deeply at Villeroy de Galhau's comments, he stated that rate hikes could come "quarters", not years after the end of quantitative easing. He also signaled that the ECB was likely to end its quantitative easing program this year despite a slowdown in the first quarter. Eurozone bond yields moved up following his comments. 10-year German bunds are currently yielding 0.612% (up from around 0.55% last week)
Turning to developments from Italy, Italian President Sergio Mattarella has granted more time to anti-establishment parties 5-Star Movement and the League to form a coalition deal. According to the League, the new government's agenda includes lowering the retirement age, new rules on immigration, and broad tax cuts.
While the euro has been spooked by recent weakness in Eurozone economic data, some hope for tighter monetary policy is helping the common currency. For the euro to enter a bullish trend, however, the ECB will need to do more than drop hints regarding the future of monetary policy. While speakers regularly send conflicting messages on the future of quantitative easing, ECB President Mario Draghi has failed to clearly outline when the Bank will tighten its "easy money" policies. As the outlook for Eurozone growth remains weak, traders are also doubtful whether the Bank will tighten monetary policies as growth visibly decelerates. Our short-term and medium-term outlook on the euro is bearish.
EUR/USD is down slightly and trading above 1.1920. The euro is up against the yen, with EUR/JPY trading above 130.90. Finally, the euro is flat against the pound, with EUR/GBP above 0.8790.
In this week’s euro economic calendar, traders will be watching inflation and growth data. The ECB's Mersch did not address monetary policy. Lautenschläger said that the Eurozone economy was within the ECB's projections. Praet said that the Bank would remain data-dependent. Cœuré said rates are likely to remain at their present level for some time. Finally, incoming ECB member Rehn suggested that growth has cooled. Later today, we’ll see Q1 figures for German and Eurozone GDP growth. We’ll also see the German ZEW sentiment survey for May, as well as Eurozone industrial production for March. On Wednesday, we’ll see the German consumer price index and the harmonized index of consumer prices for April. We’ll also see headline and core inflation for the Eurozone (April). On Friday, we’ll see the German producer price index and the wholesale price index for April. We’ll also see the Eurozone current account and trade balance for March. Last week, the ECB’s economic bulletin suggested a continuation of monetary stimulus.
As the euro weakens, we are now bearish on the currency in the medium-term. Note that the euro is currently trading within normal conditions. Our analysis is based on various technical indicators when looking at a weekly chart.