14/11/2014: Markets seeing through the positive Eurozone GDP data

For much of this week, markets have been trading sideways, seemingly waiting for a catalyst. As the week is drawing to a close the Eurozone GDP data has been announced. The headline figure showed that Eurozone GDP has ticked slightly higher to +0.2% than the 0.1% that had been pencilled in by the consensus. With most of the larger economies of the Eurozone coming in line with expectation, it seems as though the beat was driven miraculously by France which saw its own GDP rise to +0.3% (+0.1% had been expected). However markets have taken this as a signal to sell the DAX, whilst the euro has seen little real reaction.

So, France is “growing” faster than expected. However, dig a little deeper into the figures and you will see that much of the improvement was driven by an increase in government spending (which increased by 0.5% in Q2 but increased by 0.8% in Q3). There were also increases to inventories. France remains in breach of its EU budget deficit limits and this increase in spending, whilst acting as an umbrella to the storm cannot be sustainable going forward. It would seem as though the market is looking past this as an improvement that is unlikely to continue.

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So, with no real improvement in Eurozone growth, all of the existing issue remain on the table. This suggests the need remains for the European Central Bank to push ahead with as loose a monetary policy as it will allow itself. This will continue to put pressure on the euro to the downside on Euro/Dollar. EUR/USD has spent the week trading sideways, but that has been with a dearth of US economic data to drive it. That could all change this afternoon when US Retail Sales and University of Michigan consumer sentiment is released.

The Dollar Index has been largely in consolidation mode throughout this week. However, any strength to the US data this afternoon and this could induce the next leg higher. Retail Sales are forecast to improve by +0.2% in October, whilst the Michigan sentiment is also expected to tick higher to 87.5. Simply hitting these numbers could confirm the US economic recovery is still pushing forward and would drive the dollar higher.

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The Dollar Index (.DXY) may have made little real ground through this week (the euro which has been sideways this week accounts for over 50% of .DXY), however the last four days have shown a sequence of higher lows and the Dollar Index is preparing for a test of the recent 88.2 high.

The DAX continues to trade above the key support at 9149 but this marks a key neckline of a potential top pattern completion if the support were to be broken. A break below 9149 (preferably on a close below) would imply a target of 8840 on the DAX.

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