Growth & Currency can’t ignore confidence

<p>All of today’s releases of eurozone confidence indices (economic, consumer and industrial) showed marked deterioration in April. Industrial confidence hit 25-month lows at -9 from […]</p>

All of today’s releases of eurozone confidence indices (economic, consumer and industrial) showed marked deterioration in April.

Industrial confidence hit 25-month lows at -9 from -7. Economic confidence index declined to 92.8 from 94.5, lowest since December, while the consumer confidence index fell to -19.9 from -19.1.

The clash between austerity measures and economic growth is already causing political disarray in the Netherlands and raising issues between Spain’s government and the autonomous regions. Meanwhile, French presidential candidate Francois Hollande vows to add a “growth” pact to the existing eurozone if he wins the second round of elections. Although Germany insists there will be no renegotiation of the newly disciplined fiscal treaty, Hollande vows to not ratify the Treaty without changes. Hollande’s proposal for a “growth” includes Eurobonds issuance for infrastructure and investments, financing from the European Investment Bank and a financial transactions tax. To what extent will a disagreement between Hollande and Chancellor Merkel lead to a widening North-South stalemate in the eurozone remains an important question. Recall that seven years ago next month, France and the Netherlands’ rejection of an important EU referendum contributed to a eroding confidence in the eurozone, driving down EUR/USD by 10% that year.

FOMC: NFP-Dependent 
The FOMC statement was one of the least market-moving Fed events in a very long time. Minor changes involved in the shift by two FOMC members from the camp of those expecting a tightening in 2016 to those expecting tightening in 2014. But markets showed little reaction since there were no additional members voting for tightening in 2012 or 2013.

The slightly upward revision in GDP forecasts to 2.4% to 2.9% (from January’s 2.2% to 2.7%) and lower unemployment projections to 7.8% to 8.0% (from January’s 8.2% to 8.5%), were in line with the Fed’s improved outlook. Will this mean the end to further asset stimulus? Not at all.

The US April and May reports on non-farm payrolls (due in early May and June respectively) will be key for the always eventful June FOMC meeting, which should shed light on any decision on new asset purchases. We expect a second round of “Operation Twist” from the Fed to maintain USD supported after an initial pullback following the announcement effect. Until then, $1.31 support for EUR/USD will once again be tested, while any upside is expected to taper off near $1.33.

Gold continues to survive the four-year trendline support at 1620 as the combination of USD-selling courtesy of an unchanged Fed with the latest IMF data revealing ongoing central bank gold purchases providing fresh support.

US crude testing the March 1st trendline resistance at 104.20, a close above which would retarget 106.0 for now. The weekly picture continues to show an inverted Head-&-Shoulder formation, with support (right shoulder) at 98 underpinning renewed momentum towards 114-115.

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