Euro Falters As 4Q Growth Stagnates, E.U. Looks To Calm Greece Fears

Talking Points
•    Japanese Yen: Find Support on Risk Aversion and Upbeat BoJ
•    Pound: Sunk By Slowdown in Service Sector
•    Euro: Weighed by Flat 4Q GDP
•    U.S. Dollar: Finding Support On Increasing Pessimism.

Euro Falters As 4Q Growth Stagnates, E.U. Looks To Calm Greece Fears

The initial reading reported an expansion of 0.1% driven by demand from abroad. However, a revision in corporate investment to 0.8% from 1.3% offset a 1.9% increase in exports, signaling that confidence in the recovery was weak. However, the Euro-zone PMI composite reading for March was revised higher to 55.9 from 55.0 as manufacturing and services grew the most since 2007. Additionally, German factory orders grew by 24.5% in February surpassing estimates of 22.6%, signaling that demand continues to remain firm. The EUR/USD failed to recapture 1.3400 and is now looking to test the 3/26 low of 1.3267.

Despite signs that the Euro-area economy resumed its expansion in the first quarter the ECB will be hard pressed to raise rates over the near-term. Therefore, we expect that the policy maker will stick with their rhetoric that inflation and growth risks remain balanced. Greece’s troubles continue to linger with increasing speculation that the plan to provide aide was unraveling. However, the E.U, in statements today said that agreement on the plan was at “highest level”. The remarks could help ease concerns and help the single currency regain its footing.

The Pound was headed for a test of 1.5300 before a disappointing service PMI reading derailed it, reversing all of its earlier gains. The sector which accounts for 70% of the economy saw its expansion slow to 56.5 from 58.4 against expectations of 58.0. Concerns are that tight credit conditions will continue to restrict domestic growth which is why the BoE has left the door open for additional QE. The MPC is expected to leave its benchmark rate and asset purchase program unchanged at Thursday policy meeting.  Despite the state of the economy policy makers may be reluctant to take action ahead of the May 6th elections. Therefore, we could the sterling continue to trade sideways until the outcome of the elections is determined and we see a change in monetary policy.

The dollar is finding support overnight as the outlook for global growth has started to dim following the disappointing European and U.K. data. The dovish minutes from the FOMC yesterday revealed that policy makers are concerned that high unemployment is curbing the economic recovery and that “premature tightening” could be detrimental. The prospect of a low interest rate environment continuing could boost equity markets but with signs that broader growth is slowing we could see a pullback in stocks. The greenback should continue benefit from a flight to safety with its funding status secure.  The only major fundamental release on the economic calendar is Canadian Ivey PMI which is forecasted to show expansion in the manufacturing sector accelerated. The USD/Cad has climbed back above parity and a disappointing reading could lead to a larger retracement.


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To discuss this report contact John Rivera, Currency Analyst: jrivera@fxcm.com