Moderation Of Euro Strength

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Includes: DRR, ERO, EUFX, EUO, FXE, ULE, URR
by: FX Analyst
Summary

Q12015 growth is confirmed at 0.4% and confirms the steady tone of recovery.

The volatile industrial production was weak for Italy and France in April but strong in Germany. Labor conditions are overall flat in France.

Recent strength of Euro is ignited by the perception of strength by the recent ECB statement.

Taken together, these recent data shows that there is no strong growth in the EU and the market is likely to moderate its strength of the Euro.

This article will look at the latest economic drivers for the Eurozone and my opinion on how it will affect the EUR. We'll be looking at economic factors such as the GDP, industrial production for leading EU economies such as Germany, France and Italy. In addition, we will also be looking at the labor condition in France before taking a view on the euro.

Stable Growth in Q1 2015

The latest report of high importance would be the second estimate for the growth of the first quarter of 2015. Eurostat reported that the growth remained unchanged at 0.4% for that period.

Source: Eurostat

GDP growth in the Eurozone was driven by final expenditure of 0.5% and gross fixed capital formation of 0.8%. In short, there were no nasty shocks in the second estimate and the EU had indeed grown twice the speed of the United States. This sets and confirms the tone of steady economic recovery for the EU.

Industrial Production and Labor Data

As such, the market is looking forward to future growth prospects in the eurozone and the latest industrial report for the top 3 economies there. That would be the industrial report for Germany, France and Italy. The German industrial production for April increased by 0.9% after it contracted by 0.4% in March and this is much better than market expectations of 0.6% growth. As for France and Italy, the actual report was worse than expected. For the same month of April, French industrial production contracted by 0.9% after flat growth in March. This is lower than market expectations of 0.4% for April. As for Italy, the April industrial production shrunk by a smaller 0.3% after a robust 0.5% growth in March. This is lower than market expectations of a 0.3% growth.

In other words, Germany exceeded expectations while Italy and France came in below expectations. It would be natural to overreact and assume that this would signal weaker economic performance in the second quarter. However, we should note that industrial production are volatile by nature and this applies to all economies even the United States. For an example of the volatile number of industrial production, we can look at Germany's industrial production chart below.

Lastly, we have the latest French labor data, which came in largely flat for the first quarter of 2015. Gains in the services sector were offset by a loss in industry and construction sectors. The services sector added to its growth in the fourth quarter of 2014 and added 18,300 workers. The industry and construction sectors continued to shed workers from the fourth quarter at a pace of 8,100 and 10,900 in the first quarter of this year. This explains why the French labor market came in flat.

Euro Strength Perception

The source of the recent euro strength had been the ECB's assessment that the worst is over for the Eurozone. More specifically, the ECB made the following assessment of the economy in its 03 June 2015 Statement:

"In recent quarters, domestic demand and, particularly, private consumption were the main drivers behind the ongoing recovery. The latest survey data to May remain consistent with a continuation of the modest growth trend in the second quarter. Looking ahead, we expect the economic recovery to broaden."

Indeed the recent strength of the euro had been due to a series of strong economic figures such as the strong Italian labor figure and French services figure. This recent lackluster industrial production figures and the flat French labor figure, while not very weak in themselves, does suggest that the momentum of recovery may not be as strong as previously thought. Hence, it is likely that the market would pare down on its recent gains on the euro to avoid getting ahead of itself.

Euro Moderation

The euro strength can be seen in the CurrencyShares Euro Trust (NYSEARCA:FXE) chart above. It has been on a largely bullish trend since the beginning of the month. The euro strength had not come from an undisputed strength of the economy like what the US experienced in the second quarter of last year. Rather, it has been due to an adjustment of market perception that the EU might be stronger than expected.

The Q1 2015 GDP reading of 0.4% confirms that the market did not make a significant mistake on the strength of the US economy. However, the slightly weaker industrial production data did suggest that EU growth would be lackluster. Hence, there is no reason to gain much exposure to the Euro. Hence, the euro would moderate its strength going forward.

Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.