The euro zone is struggling with recession, but the news isn’t weighing on the euro these days. Stalemate over budget negotiations in Washington comes to mind as one of the likely if temporary sources of support. It's all about the numbers eventually, but rumor and rhetoric cast long shadows in these strange and troubled times.
The outlook is more complicated for EUR/GBP's ascent, especially with competing ECB and BoE monetary announcements scheduled for Thursday. But it's all about relativity generally, more so than ever until deeper clarity arrives. A clue for deciding what could change, or not, may be slip out in today's update on EU producer price inflation for October.
EU PPI (10:00 GMT) ECB chief Mario Draghi on Friday tried to put a positive spin on the economic outlook with a forecast that "the recovery for the entire euro zone will no doubt begin in the second half of 2013." But the central banker's preference to look down the road was forced to compete with some of the darker news du jour, including a jobless rate for the the core 17 EU nations that pushed higher into record territory: 11.7% in October, up slightly from 11.6% the month before.
Eurostat on Friday also announced in its flash estimate of euro area inflation that pricing pressures are expected to decline to a 2.2% annual rate for November, down from 2.5% in October. Disinflation apparently has some momentum again, a sign the recession across much of Europe isn't easing.
Will today's PPI update show inflation is fading in the industrial sector too? The previous PPI report advised that producer price inflation slowed sharply in September: 0.2% vs. 0.9% for August. But much of the drop was due to lower energy prices. Nonetheless, October's profile is expected to remain flat to down for PPI. Would such news be enough to create headwinds for the euro rally? Not if the reckless game of brinkmanship with the fiscal cliff negotiations in Washington rolls on.
EUR/USD levels: The euro’s rally to the 1.30 mark recently is a run of strength that many analysts thought unlikely just a week ago. The diminished state of eurozone economics relative to the US, after all, looks rather telling. But EUR/USD managed to confound the conventional wisdom. The revival of the euro rests on shaky ground, however, relying in part on the self-destructive sport that passes for politics as usual in the US. News that the pols have agreed on a plan to steer away from the fiscal cliff may still look like a long shot, at least for the immediate future. But if and when a new breed of headline crosses the wires, EUR/USD will have new hurdle (and the same old macro data).
Another catalyst that might change the calculus is the ECB meeting on Thursday. The possibility of a rate cut is considered unlikely, but a surprise revolt by the doves could reshuffle assumptions. True, analysts say Draghi and company will leave the target rate at 0.75%, which looks rich compared with its equivalents at the Federal Reserve (0.25%) and the Bank of England (0.50%). But with the economy under the ECB still reeling as the weakest of the bunch, the case for lower rates in the eurozone isn’t easily dismissed.
Of course, marginal changes in relativity can mean a lot these days. Yesterday’s news that the ISM Manufacturing Index for the US was unexpectedly weak (it fell below the neutral 50 mark in November) reminds that America’s macro edge may not be as strong as it appeared to be in the recent past.
