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Euro Remains Range Bound Despite Contracting German Growth, BoE's King Signals More Rate Cuts

Tuesday, 25 November 2008 10:11:18 GMT  |  John Rivera, Currency Analyst

The Euro remained in a tight trading range after it ran into resistance at 1.2950 as final GDP figures confirmed the German economy slipping into a recession. Euro price action has remained in the broad range between 1.2400 – 1.3000 as forex traders have been unable to determine a dominant trend.

Talking Points
• Japanese Yen: Threatens 95.70
• Pound: Kings Signal That ZIRP a Possibility
• Euro: German Growth Contracts
• US Dollar: GDP Housing Data On Tap

Euro Remains Range Bound Despite Contracting German Growth, BoE’s King Signals More Rate Cuts

The Euro remained in a tight trading range after it ran into resistance at 1.2950 as final GDP figures confirmed the German economy slipping into a recession. Euro price action has remained in the broad range between 1.2400 – 1.3000 as forex traders have been unable to determine a dominant trend. Growth in Europe’s largest economy contracted by 0.5% as a decline in exports stunted growth. However, the country saw the Gfk consumer confidence reading rise to 2.2 from 1.9 on the back of declining oil prices, which coul help fule domestic growth.

Despite this improvement in consumer optimism the outlook for the Euro-zone remains grim as the OECD forecasted that growth in 2009 will decline by 0.6%. The organization also predicted that inflation would fall below the ECB’s 2% target leading opening the door for more rate cuts by the central bank. The OECD ‘s report called for more fiscal stimulus and further easing in order to stem the decline in growth. This will feed declining interest rate expectations which will remain a weighing factor for the single currency as markets are pricing in another 121 bps worth of rate cuts.

The Pound found resistance overnight at 1.5150 as it failed to break above after a number of tests. The Sterling may trade heavy going forward as dovish comments today from BoE governor King and other committee members signaled that a ZIRP (zero interest rate policy) is being discussed. The MPC leader stated that in order to enact a ZIRP the central bank would need to coordinate with the government which may make it more difficult to achieve, but signals that a 1% benchmark rte is a near certainty. The governor painted a grim outlook when he stated that the credit squeeze has generated “big downside risks” and that further recapitalization of banks was needed. He would go on to say that the country had a “long hard road to fiscal health”.

The second reading of the 3Q GDP figures are expected to show that the economy slumped more than initially predicted. Growth in the U.S. is expected to have fallen 0.5% down from its initial estimate of -0.3% as frozen credit markets grinded the economy to a halt. Indeed, the OECD predicted that the economy will contract 0.9% in 2009. The pessimistic outlook for the U.S. economy could lead to dollar weakness unless the data generates risk aversion which has been a supportive factor for the greenback. Additionally, the optimism generated by the Citigroup bailout and the revealing of the new economic team for President –Elect Barack Obama may give way as a slew of negative fundamental data is due to cross the wires. The S&P Schiller home price index is predicted to show a 16.9% drop in values. This combined with the 3.1% decline in existing home sales that we saw yesterday demonstrates that the housing market hasn’t slowed its decline and will remain an albatross on the economy. The contracting economy has weighed on Americans leading to expectations that sentiment will remain at a record low of 38.0 despite declining gasoline prices.

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Related Articles:

Bank of England Reiterates Credit Concerns Amid Mandate for Price Stability
U.K. Mortgage Approvals, Business Investments Falter Fueling Expectations for a BoE Rate Cut
US Dollar, Japanese Yen Falter as Citigroup Rescue Boosts Demand for Carry Trades

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

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