Euro May Regain Fundamental Control with its Own With GDP Numbers

Though it is a long-term concern; the desire to diversify away from a heavy exposure to a volatile US dollar is a global one. And, as we can see through the IMF’s recent measure of the world’s central bank’s reserves, there is already a definable effort being made to lessen the single currency’s presence on balance sheets. In this fundamental change, the primary benefactor is without doubt the second most liquid currency: the euro. It is important to understand that this relationship doesn’t mean that we will have a significant shift from the dollar to euro in the next week, month or even year; but what it does mean is that these two currency’s are inextricably linked. And, the dollar is threatening a meaningful, bullish reversal after a month of congestion. There are a few factors that can turn the dollar; but the most likely culprit is risk appetite. Still among the top funding currencies in the currency market; the dollar has been drawn lower than economic fundamentals and interest rate speculation would alone suggest. This chasm between speculative and fundamental interest will likely be closed sooner than many expect; and we can be sure that the euro will lead the retreat as the dollar regains lost ground.

With that larger and ill-defined threat in the back of our minds, there is also a round of European economic data due this week; and the headline release is the first round 3Q GDP numbers. As suggested above, Friday is the worst day of the week to develop trends because liquidity fades as each session closes for the weekend. Nonetheless, if there is substantial shift in the data; the market will move whether everyone is there to participate or not (and if it is indeed meaningful enough, it can spark a trend that carries momentum well beyond a single day’s volatility). Looking at economists’ official forecasts, the German economy is seen growing 0.8 percent over the three months; France will have expanded 0.6 percent; and the entire Euro Zone is expected to push back into positive territory for the first time in six quarters with a 0.5 percent pickup. Considering the IMF is projection a meager 0.3 percent growth through 2010 and ECB President Trichet has warned that growth could be very frail; this data has the ability to charge bullish or bearish expectations.

Before we come to the main event on Friday, the economic docket will offer plenty of data to feed more timely expectations of activity and sentiment. The ZEW and Sentix investor confidence surveys will gauge the expectations from the most sensitive economic players. Industrial production and trade are also notable updates – which will be especially important for Germany who is heavily dependent on its manufacturing and export sectors for broader growth. – JK

Written by: John Kicklighter, Currency Strategist for DailyFX.com
Questions? Comments? Send them to John at jkicklighter@daiyfx.com