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Euro Drifting As German GDP Matches Forecast

The euro is almost unchanged in the Friday session, as EUR/USD trades at 1.0870. On the release front, German Preliminary GDP gained 0.6%, matching the forecast. German Final CPI came in at a flat 0.0%, also matching the estimate. Eurozone Industrial Production contracted 0.1%, marking its third decline in four months. The weak reading missed the estimate of +0.3%. It’s a busy day in the US, with CPI and Retail Sales reports for April. We’ll also get a look at UoM Consumer Sentiment. Given the host of key events, traders should be prepared for some volatility from EUR/USD in the North American session.

A solid German economy has been the primary driver of an stronger euro area economy, which has posted improved numbers in the first quarter of 2017. Germany’s economy expanded 0.6% in the first quarter, compared to a 0.4 gain in Q4 of 2016. The upswing was broadly based, with strong consumer and state spending, and an upsurge in the construction and manufacturing sectors. Stronger global demand has boosted German exports. However, inflation continues to recede, as Final CPI dropped to 0.0%. This trend has also characterized inflation in the eurozone, which showed rose earlier in the year but has since retracted.

The eurozone economy received a passing grade on Thursday, as the European Commission released its Spring 2017 Economic Forecast. The report noted that the European economy is in its fifth year of recovery, and forecast eurozone GDP growth of 1.7% in 2017 and 1.8% in 2018. On the inflation front, the report stated that inflation had risen in recent months, but this was mainly due to an increase in oil prices. Still, inflation was expected to reach 1.6% in 2017 and 1.3% in 2018, compared to just 0.2% in 2016. Stronger growth has led to lower unemployment, and the report projected that eurozone unemployment rate would drop to 9.4% in 2017 and 8.9% in 2018. The report also sounded a cautionary note, warning that risks to the eurozone economy remain tilted to the downside. These risks include a protectionist economic and trade policy in the US under President Trump, the banking sector in Europe and the UK’s exit from the EU. This forecast is considerably more optimistic than the Winter 2017 forecast, as is apparent from the captions in the press releases for these two reports: The Winter forecast was entitled “Navigating through choppy waters”, while the caption for the Spring forecast reads “Steady growth ahead”.

President Donald Trump’s firing of FBI director James Comey was perfectly legal, but the move has set off a political firestorm in Washington. Trump has been accused of triggering a constitutional crisis and undermining the rule of law. Comey had been conducting an investigation into possible collusion between Trump and Russia during the presidential campaign, so predictably, Comey’s dismissal has raised suspicions that Trump is trying to impede the investigation by firing Comey. The crisis could heat up further, with calls in Congress to appoint an independent investigator into Trump’s connections with Russia. This latest political storm has yet to shake up the markets, but a prolonged crisis could paralyze Washington and delay Trump’s agenda of tax reform and increased fiscal spending.

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