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Euro, Pound Whipsaw After German GDP Figures Signal Recession

Thursday, 13 November 2008 09:57:15 GMT  |  John Rivera, Currency Analyst

The Euro would drop to as low as 1.2388 after the German GDP report showed that Europe’s largest economy had contracted 0.5% in the third quarter.

Talking Points
• Japanese Yen: Finds Resistance at 96.25
• Pound: Falls To 77 Month Low
• Euro: Germany Enters Recession
• US Dollar: Trade Balance on Tap

Euro, Pound Whipsaw After German GDP Figures Signal Recession.

The Euro would drop to as low as 1.2388 after the German GDP report showed that Europe’s largest economy had contracted 0.5% in the third quarter. The decline in growth followed a revised 0.4% in the second quarter verifying that the economy is in its worst recession in 12 years. The Euro’s slide was temporary as German corporate buying would send the single currency back above 1.2530 before finding resistance.

The ECB would follow the dour German growth report with a bleak monthly statement in which the MPC lowered its growth and inflation estimates increasing speculation that they will cut rates at their December 6th meeting. The growth estimate for 2009 was lowered to 0.3% from 1.3%, while the long-term inflation expectations are calling for prices to drop bellow the council’s 2% target. Indeed, French consumer prices eased in October by 0.1% validating the estimates. Credit Suisse overnight index swaps are pricing in 106 bps of cuts from the central bank over the next twelve months, which could lead to the Euro trading heavy throughout the remainder of the year.

The British pound saw similar price action to the Euro following the German GDP figures, dropping to as 77 month low of 1.4806. The Sterling would also bounce from support ending a 600 pip decline from yesterday. The freefall which started with the BoE’s dour quarterly inflation report where the MPC considerable lowered interest rate expectations and left the door open for a possible (ZIRP) zero interest rate policy. If the central bank continues to cut rates aggressively the Pound could sink below 1.3000 in early 2009.

The upcoming U.S. trade balance report is expected to show a narrowing of the deficit on the back of declining oil prices. Although the anticipated -$57.0 billion deficit would be the smallest in six months, the positive fundamental data doesn’t figure to have an impact on the dollar as risk winds continue to dominate its direction. Asian and European stocks continued the slide that started yesterday in the U.S. following Hank Paulson’s announcement that the focus of the TARP would change from buying toxic assets from banks balance sheets to relieving pressures in consumer credit in areas like credit card debt, auto loans and student loans. If the uncertainty of the impact of the new focus of the TARP continues to trouble investors then the dollar may continue to benefit from safe haven flows.

Will The EUR/USD Fall to 1.2000? Join us in EURUSD Forum

Related Articles:

Dollar Finds Firm Footing In Risk Aversion, Relative Rate Forecasts
ECB Lowers Inflation and Growth Forecasts, Raising Expectations for Lower Borrowing Costs
BoE Expects Inflation to Fall Below Target, Raising Scope for Additional Rate Cuts

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

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