Currencies

Thursday May 15, 09:27 AM
Forex - Euro jumps on German GDP surprise; inflation, ECB comments next in focus

LONDON (Thomson Financial) - The euro stormed higher after a positive surprise from German growth figures, and looks set to remain sharply in focus with a packed day of news and data on the euro zone ahead, including testimony from two European Central Bank policymakers.

The German economy grew 1.5 percent in the first three months of the year, provisional figures showed, way above forecasts for growth of 0.7 percent and marking the fastest increase in over a decade.

Economists said this strong performance from the euro zone's biggest economy will allow the European Central Bank (ECB) to continue its vigilance on inflation, ruling out near-term cuts in interest rates even though growth is likely to wind down in the second quarter.

'Whilst the most recent data does point to much slower growth in the second quarter of 2008, the resilience at the start of the year combined with still high inflation will strengthen the position of the hawks on the ECB and rules out any lingering chance of a near term rate cut,' said Stuart Bennett, senior FX strategist at Calyon.

Final inflation data for April in the 15-nation bloc is due later this morning and will be watched for any further guidance on the path of euro zone interest rates. Eurostat is expected to confirm CPI (NYSE: CPY - news) inflation moderated to 3.3 percent from 3.6 percent in March.

Analysts said continued strength in euro zone inflation could begin to damage the euro if markets believe high prices are preventing the ECB from supporting the economy by cutting interest rates.

However, the main focus will be on testimony from ECB president Jean-Claude Trichet later in the morning, followed by fellow rate-setter Yves Mersch.

The state of the U.S. economy will swing into focus later in the session, with the Empire State and Philly Fed manufacturing surveys due, alongside industrial production data.

James Hughes, markets analyst at CMC Markets, said weak readings could undermine the growing belief among investors that the U.S. economy has passed the worst of the current downturn.

'There is concern that the Empire manufacturing survey may dip into negative territory and forecasts are already suggesting that the U.S. industrial production data will dip into the red too, so it's going to be factors like this that will once again call into question just whether the U.S. economy is close to turning the corner,' Hughes said.

London 0805 GMT Tokyo 0415 GMT

U.S. dollar

yen 104.74 down from 104.90

Swiss franc 1.0501 down from 1.0530

Euro

U.S. dollar 1.5527 up from 1.5477

yen 162.64 up from 162.38

Swiss franc 1.6307 up from 1.6302

pound 0.7973 up from 0.7950

Pound

U.S. dollar 1.9471 up from 1.9463

yen 203.95 down from 204.18