Euro Mounts a Comeback After Labor Data

Market Trends - 01/06/2017

On the heels of a stronger-than-anticipated unemployment reading earlier in the session, the Euro is rebounding after concerns about Italian elections and the possibility of Greek default sent the EURUSD currency pair tumbling from multi-month highs.  Data compiled by Eurostat showed that the jobless rate in the aggregate Euro Area fell to 9.30% in April, marking the best reading since March of 2009 after the prior month’s figure was also revised lower from 9.50% to 9.40%.

The positive traction represents a significant turnaround compared to the tepid economic activity reported in the monetary union a year ago when asset purchases began.  However, even with the resounding employment optimism, inflation fell to a five-month low for the month of May, denting sentiment.  The headline consumer price index decreased to 1.40% on an annualized basis, missing estimates of a 1.50% gain in prices for the twelve months ended in May. In addition, core inflation slipped to 0.90% from 1.20%, highlighting the uphill battle facing the European Central Bank as it attempts to restore inflation and growth to the Euro Area.

In spite of highly accommodative monetary policy measures which include record low interest rates and asset purchases, the weakness in inflation signals that the exit from stimulus may not be as simple as previously anticipated.  With the inflation boost from higher energy prices gradually fading as evidenced by the deceleration from a 7.60% increase in April to just a 4.60% gain in May, the ECB may be forced to maintain purchases and zero interest rates for an extended period.

Clouding the outlook further is the possibility that Greece defaults on an upcoming bailout repayment should creditors be unwilling to participate in some form of debt relief.  Considering Germany’s adamant opposition to such a move alongside approaching elections, this is highly unlikely to be approved, setting up the Euro Area for another showdown with Greece as the debt crisis persists.  With this backdrop in place alongside weakening inflation, the upside for the Euro may be limited over the near-term as markets reassess the blooming risks facing the European Monetary Union.

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