Why The Euro Is Rising

Includes: FXE
by: Andrew Sachais


Consumer spending in the euro area is increasing.

Moreover, employment and wage gains are driving sentiment higher.

If consumers continue to lend support to economic activity, the euro could rise in coming months.

The euro is rising as consumer spending increases due to low inflation, stronger employment, and higher wages. The euro is represented by CurrencyShares Euro Trust (NYSEARCA:FXE).

In March, the retail sales figure came in at an annual pace of 1.6%, down from the previous month's revised reading of 2.8%, while also missing estimates for 2.4%. Since the start of 2013, however, consumer spending increased from -3.0% annual contraction, to current levels. A mixture of low consumer prices and increasing sentiment aided spending measures.

Inflation measures have trended broadly lower since 2012. In April, the inflation figure came in at an annual pace of 0.0%, above the previous month's reading of -0.1%, while in line with estimates for 0.0%. Over the last few years, however, inflation has fallen broadly lower, from 3.0%, to current levels. Weak energy costs weighed on the price measure.

"Services (0.9 percent, compared with 1.0 percent in March) and food, alcohol and tobacco (0.9 percent, compared with 0.6 percent in March) are expected to have the highest annual rates in April, followed by non-energy industrial goods (0.1 percent from 0.0 percent in March) and energy (-5.8 percent from -6.0 percent in March)," according to Trading Economics.

Moreover, employment gains in the euro area have produced both increased sentiment and spending among consumers. In the fourth quarter, the employment figure came in at an annual pace of 0.84%, above the previous quarter's reading of 0.47%. Since bottoming in 2009 at -2.0% annual contraction, employment has pushed higher, seen below. Rising employment across the currency bloc has been attributed to both labor market reforms, as well as monetary policy easing.

Data provided by the OECD

Additionally, as employment has risen, wages followed closely behind. In the fourth quarter, the wage figure came in at an annual pace of 1.70%, below the previous quarter's reading of 1.88%. While wage growth has slowed in recent quarters, it is still near multi-year highs, as well as exceeding lows experienced during the financial crisis of -1.0% annual contraction, seen below.

As consumers in the currency bloc strengthened, economic activity rose. Employment and wage measures are increasing, leading to improved sentiment. This has pushed consumer spending higher, alongside low price pressures.

Economic strength in the currency bloc is leading to selling pressure on government bonds, such as the German bund, increasing yields, while pushing the euro higher, at least in the intermediate term. If economic activity remains strong, expect the euro to continue on its trend higher in coming months.

Data provided by the OECD

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