Light at the end of the tunnel for the eurozone

 
on January 18 2013 1:04 PM

The euro has shown signs of strength over the last two days, after further evidence that the eurozone could be past the worst of the crisis.

The eurozone is still in recession, the GDP for the region contracted by 0.1% in the last quarter. However, there are signs that the fundamentals are in a position to support a return to growth. Reports on Tuesday showed that the trade balance for the euro-region increased from 8.2B to 11.0B and the unemployment rate as a whole remained steady.

Signs of turnaround

The danger for the eurozone over the last year has been the steady divide between the core economies and those that are struggling.

There are, however, indications that struggling economies are starting to turn around. For example, the services purchasing manager index (PMI) - a report that surveys purchasing manager’s opinions on the current business climate – is down overall for the eurozone at 47.8. Any figure below 50 is a contraction. 

However, the contraction for individual countries is slowing. Spanish PMI was reported to be 44.3, up from 42.7 and Italian PMI is reported to be 45.6, up from 45.1. The confidence of purchasing managers is a good insight into possible spending in the future.  If purchasing managers are growing in confidence, then business spending overall could be due to increase, which is good for the economy.

Confidence growing

This confidence seems to have been reflected in the Spanish bond market. Yields are lower with the 10 year rate holding steady at 5%. The markets seem to be optimistic over Spain’s future and may even agree with, Iñigo Fernández de Mesa - chief of the treasury in Spain – who declared that Spain will not be seeking a bailout.

The euro has shown steady increase against the yen in recent months, which could continue in light of the positive developments over the eurozone.

The EUR/JPY is coming up to a critical resistance level at 123.26.  If this level breaks, then a Fibonacci level at 135.34 could provide strong resistance. If the EUR/JYP fails to break to the upside, then 115.912 and the Fibonacci level at 109.856 are both likely key support prices.

 

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