German DAX At Milestone High

The major talking point on the financial markets on Friday was the German DAX reaching 11,000 for the first time. There was a surprise to the upside with the quarterly GDP data from Germany as the actual figure was in at 0.7%, rather than the 0.3% expected. The figure does indicate that Europe’s largest economy is moving away from the unexpected turbulence it experienced during the second half of last year and when you see a GDP performance like that from Germany, you can clearly understand why there was reluctance from the nation for ECB QE.
A variety of GDP figures from around Europe came in slightly higher than forecasts and although overall quarterly growth at 0.3% will not see an end to EU economic woes, it will be hoped that the introduction of ECB QE will lift economic fortunes. Aside from the milestone move in the German DAX, movement in the EUR/USD has been rather muted with this just further highlighting how cautious traders are remaining with the situation still to be cleared up over Greece. In regards to austerity measures, Spain was one of the best GDP performers which in my view opens up the discussion of how structural reforms can be successful.

In any case, it is likely that headlines around Greece will continue throughout the weekend before the highly anticipated eurozone finance ministers meeting commences on Monday. While I admit that the comments from someone of the stature of German Chancellor Angela Merkel that a compromise is possible could represent a crucial step towards progress around the issue, comments have just become part and parcel of this whole saga and the issue will not be resolved until an actual agreement is confirmed.

The GBP/USD must win the award for the unexpected advancer of the week, with the pair reaching as high as 1.5418 today despite BoE Governor Carney switching stance and announcing that there is still room for the BoE to cut UK interest rates or consider further QE. What traders seem to have liked from the BoE inflation report is that the UK GDP forecasts for the following three years were revised higher. The UK economic outlook has never been in doubt and the hat trick of PMIs last week revealed that the UK economy has commenced the year with some robust momentum. There was a slight slip up with monthly construction output for December coming in at 0.4%, way below 2.7% forecasts, which has halted the sterling bulls from making further strides forward.

I do think that part of the reason behind the GBP/USD advance was the USD softness following the weak US retail sales data, so extra USD weakness might be required for this breakout to continue. GBP/USD volatility will continue into next week as well with the UK inflation data from the United Kingdom announced next Tuesday, and the FOMC Minutes from the US Federal Reserve released on Wednesday evening. The GBP should be facing downside risks with the UK inflation data most likely showing inflation has turned negative, particularly if the FOMC carry on ignoring slightly disappointing US economic data and continue to push towards hiking interest rates during the second half of the year.

The USD/CHF is basically taking a snooze while economic data from both Switzerland and the United States is low in volume, while the Swedesh krona attempted to modestly regain losses following the Riksbank cutting interest rates and surprising the markets with the introduction of QE on Thursday. The Norwegian Kroner is also advancing against the USD, with this move possibly linked to the bounce back in commodity prices over the previous day. The Turkish lira is weakening slightly after recovering some large losses against the USD yesterday, while ruble volatility has been unusually quiet which must be linked to speculation surrounding whether the new ceasefire between Russia and Ukraine will be respected.

Other than a US consumer confidence reading in a couple of hours, economic data is quiet this afternoon. More advanced consumer sentiment readings from the United States might push the S&P 500 close to a record high. Monday morning will likely see volatility pick up because aside from the eurozone finance ministers meeting, it is expected to be confirmed that Japan has exited a recession with its GDP data announced in the early hours of Monday morning. This could inspire some further JPY strength.

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