Financial market research and analysis

Our analysts have their fingers on the pulse of the world's financial market news.

CFD trading is high risk and may not be suitable for everyone.
Trump’s State of the Union & bond bears

Eurozone Growth on solid footing

 

Eurozone growth remained solid in the fourth quarter. EZ Q4 GDP hit 0.6% q/q and accelerated to 2.7% y/y, up from 2.6% in Q3. The Eurozone economy grew by 2.5% in 2017, up from 1.8% in 2016. Eurozone growth was faster than the US and now stands nearly a full percentage point above that of the UK. The momentum in Europe’s economy goes a long way to explain bullish attitudes towards the euro and European stocks. The well-received GDP data figures helped lift the euro but global factors could limit the gains.

 

State of the Union address could support the dollar

 

EURUSD has eased back from the 1.25 big level and over 3% year-to-date gains since Trump aired his support for the dollar in Davos. It is unlikely the State of the Union will make any specific reference to the dollar. The Donald is unlikely to want a repeat of the confusion caused by Treasury Secretary’s pro-weak dollar comments, which Trump had to tidy up shortly afterwards. The most probable channel for dollar demand generated by Trump’s State of the Union is via expectation for US growth. Should Trump reveal some juicy details on his long-awaited infrastructure plan, that could further pump up growth expectations.

 

Dollar looks strong with rising Treasury yields

 

Trump’s support as well as rising US Treasury yields have given rise to what could be a brief period of dollar-strength. The spread between 10-year Treasuries and German 10-year bunds is widening again, but this time it is the strength in Treasury yields because of higher inflation expectations- rather than falling German yields because of the ECB’s QE program. A potential bear market in bonds has already started make its presence felt with yesterday’s downturn in equities. A correction in equities after such a long bull run could spur a race to safe assets, including gold.

 

German CPI up next

Looking forwards, German CPI will be relevant given that sluggish inflation is what is allowing the ECB to keep its foot on the QE accelerator. This week ECB policymaker Benoit Coure reiterated plans for a gradual winding down of the quantitate easing programme, rather than putting an end date to it. Investors will be keen to see if German CPI, which can act as a precursor for Eurozone CPI, is on the move closer to the ECB’s 2% target. CPI on a monthly basis is forecast to drop -0.6%, whilst the annualised reading is expected to stay constant at 1.7%.

 

The information and comments provided herein under no circumstances are to be considered an offer or solicitation to invest and nothing herein should be construed as investment advice. The information provided is believed to be accurate at the date the information is produced. Losses can exceed deposits.

CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 79% of retail investor accounts lose money when trading CFDs with this provider. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.