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EUR/USD rebound seen limited as key US data loom

H.S. Borji
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The euro rebounded against the US dollar Monday amid stronger than expected Eurozone consumer confidence data, although the gains were limited as investors looked ahead to an active Tuesday session headlined by key US figures.

The EURUSD reached an intraday high of 1.2275, unable to climb above the 1.23 level after declining sharply in the back-half of last week. The pair would subsequently consolidate at 1.2257, advancing 0.29 percent.

The euro is clawing back after plummeting more than 2.1 percent in the second-half of last week. The US dollar received a significant push after the Federal Reserve hinted at a possible rate-hike next year. Fifteen of 17 Fed officials indicated that 2015 would be the “appropriate timing of policy firming,” according to the quarterly summary of economic projections released alongside the official policy statement. According to a median estimate of policymakers, the benchmark lending rate will be 1.125 percent at the end of 2015.

The push toward rate normalization highlights the growing divergence between the Federal Reserve and European Central Bank. A stagnant Eurozone recovery, highlighted by shaky consumer confidence, geopolitical tensions and tame inflation, will likely result in added stimulus measures from the ECB, which could begin buying sovereign government bonds as early as next year. The ECB has already slashed interest rates to 0.05 percent and introduced a negative deposit rate to help revive the struggling economy, which is expected to grow around 1 percent in all of next year.

In economic data, Eurozone consumer confidence improved slightly in December, although the overall picture remained gloomy. The European Commission’s flash estimate of euro area consumer confidence increased 0.6 points to -10.9. Economists forecast a 0.5 point increase to -11.0. The previous month saw consumer confidence decline from -11.1 to -11.6.

Falling energy prices and gradually rising incomes are forecast to boost consumer confidence in the near-term, which could help kick start the region’s nascent recovery. Euro area growth averaged just 0.2 percent in the third quarter after stagnating in the previous quarter. In annualized terms, growth was just 0.6 percent. Output in the 19-nation currency bloc remains more than 2 percent below its pre-crisis levels.

In the United States, third quarter GDP is expected to be revised upward yet again on Tuesday, signaling a faster pace of expansion. The US economy grew 3.9 percent annually in the third quarter, revised estimates showed last month. Tuesday’s revision is expected to show an annualized growth rate of 4.1 percent.

The US economy grew 4.6 percent annually in the second quarter, as output rebounded sharply from Q1’s weather-induced contraction. Overall, the second and third quarters saw the biggest back-to-back gains in GDP growth since 2003.

The Commerce Department will also report on November durable goods orders on Tuesday, a leading indicator of business investment. Durable goods orders are forecast to rise 1.8 percent in November following a 0.4 percent increase a month earlier. Excluding transportation equipment, durable goods orders are forecast to rise 0.7 percent.

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