Euro Hits 1.1250 as ECB Sees Stronger Signs of Growth

The Euro surged to a 2-month high against the greenback on Thursday touching 1.1250 before profit taking pushed the currency pair back below 1.12. Stronger than expected inflation combined with a contracting yield differential has pushed the currency pair higher. Spanish GDP was stronger than expected, which could be a signal that the ECB might taper its QE program earlier than expected.

Eurozone April HICP rose to 0.0% year over year from -0.1% year over year in the previous month, slightly stronger than forecasts. The higher than expected number for Germany was counterbalanced by a steady Italian HICP rate. The overall Eurozone number is no longer in negative territory and core inflation remained steady at 0.6% year over year. The ECB report Thursday also highlighted the decline in inflation expectations has been halted and the numbers confirm that deflation risks have diminished, and that headline rates will continue to rise gradually amid stabilizing growth and a weaker EUR and as negative base effects from lower energy prices fall out of the equation.

ECB sees strengthening growth, but low inflation. The central bank’s latest economic bulletin notes the improvement in growth, but highlights that the economic slack in the Eurozone will diminish only gradually and that inflation will remain very low in coming months. Central bankers are clearly eager to ensure that higher growth numbers don’t lead to renewed tapering speculation and to re-assure markets that monetary policy will remain expansionary, even if the central bank also acknowledged that the decline in longer-term inflation expectations has ended. This confirms that the risk of a deflationary spiral has diminished, which the ECB argues is thanks to its policy measures.

German jobless numbers dropped 8K in April, which left the seasonally adjusted unemployment rate unchanged at 6.4%, as expected. The German economy is strengthening and jobless rates are at very low levels, which together with increasing demand will ensure sizeable wage gains this year. Rising real disposable income, also helped by low inflation, will strengthen consumption trends and domestic demand, which are the main drivers of the German recovery.

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