Euro at Risk if Spanish GDP, Slower Inflation Drive ECB Rate Cut Bets

Euro at Risk if Spanish GDP, Slower Inflation Drive ECB Rate Cut Bets

Talking Points

• Euro at Risk if Spanish GDP, Slower Inflation Drive ECB Rate Cut Bets
• Australian Dollar Underperforms as Traders Set Sights on RBA Meeting

Spain’s Gross Domestic Product report headlines the economic calendar in European hours. Expectations call for output to shrink 0.4 percent in the first quarter from the three months through December, marking the second consecutive print in negative territory and putting the country in a technical recession. Traders are looking to the outcome in the context of the Eurozone debt crisis amid widespread fears that Spain is doomed to follow Greece down the path to insolvency. A weak reading is likely to unnerve investors fearing that an economic slump will reduce the government’s tax take and limit scope for additional austerity, derailing deficit-reduction efforts.

Elsewhere, a preliminary estimate of April’s Eurozone Consumer Price Index reading is expected to show that inflation slowed to an annual rate of 2.5 percent, the lowest in eight months. Taken together with confirmation of recession in Spain, the currency bloc’s fourth-largest economy, the result may begin to plant seeds of ECB rate cuts on the horizon. Needless to say, such outcomes stand to threaten the Euro. On the issuance front, France is due to sell €8 billion in 91-, 154- and 364-day bills. As usual, markets will be monitoring average yield and bid-to-cover readings for signs of funding stress, although the short tenor of the debt on offer may somewhat limit the potential for fireworks.

The Australian Dollar underperformed overnight as traders looked ahead to tomorrow’s RBA interest rate decision, where policymakers are widely expected to cut benchmark borrowing costs by 25 basis points. The day’s economic data set reinforced selling pressure. An inflation gauge from TD Securities put the annualized price growth rate at 1.9 percent in April, marking the second month below the RBA’s 2-3 percent target range. Separately, year-on-year Private Sector Credit growth slowed to 3.4 percent, the weakest in six months. A three-month low on China’s Leading Economic Index likewise undermined the Aussie amid fears that slowing conditions in Australia’s top export partner will translate into faltering growth and ultimately deeper RBA rate cuts in the month ahead.

Asia Session: What Happened

Euro Session: What to Expect

Critical Levels

--- Written by Ilya Spivak, Currency Strategist for Dailyfx.com

To contact Ilya, e-mail ispivak@dailyfx.com. Follow me on Twitter at @IlyaSpivak

To be added to Ilya's e-mail distribution list, send a note with subject line "Distribution List" to ispivak@dailyfx.com