Euro rebounds on strong GDP, inflation data

The euro has bounced back on Friday with strong gains, ending a nasty 6-day losing streak. In the European session, EUR/USD is trading at 1.0565, up 0.64% on the day.

German GDP up 4.0%

It has been a rough road for the euro, which hit a 5-year low this week as it broke below the 1.05 line. We’re seeing a correction today, primarily due to solid GDP data out of Germany and the Eurozone. German GDP rose 4.0% in Q1 YoY, above the estimate of 3.8% and well ahead of the 1.8% gain in the Q4 of 2020. Eurozone GDP rose to 5.0% on an annualized basis, matching the forecast and above the prior release of 4.7%. The euro also received a boost as Eurozone CPI is expected to hit 7.5% YoY in April, up from 7.4%.

Despite today’s positive data, there are dark clouds on the horizon, which will more than likely send the euro back to its losing ways. France and Italy, the largest economies after Germany in the eurozone, both recorded negative growth of -0.2% QoQ in Q1, while Germany eked out a 0.2% gain. This points to the heavy toll that the Ukraine war has taken on the eurozone economies, and the war could certainly intensify, with Russia making a push in the eastern and southern parts of Ukraine.

There is also uncertainty surrounding the sanctions against Russia. On the one hand, there is talk of the EU banning oil imports from Russia, which would badly hurt the Russian economy but also dampen growth in Western Europe. At the same time, there are reports that some major European energy companies have accepted Moscow’s demands to pay for gas and oil in roubles. This could lead to a collision between the companies and European governments, which could turn into another headwind for the struggling euro.

As if the euro doesn’t have enough on its plate, the hawkish pivot by the Fed has widened the US/Europe rate differential and sent the euro tumbling in recent weeks. With the Fed poised to raise rates by 0.50% next week and further super-size rate hikes on the table, the euro appears on track to drop to 1.03, and parity has become a realistic possibility.

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EUR/USD Technical

• 1.0553 is a weak support line. Below, there is support at 1.0411
• There is resistance at 1.0657 and 1.0728

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