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Euro Gains Capped By Lowest GDP Since 1995, Pound Soars Ahead of G-7

Friday, 13 February 2009 10:11:10 GMT  |  John Rivera, Currency Analyst

The Euro would reach as high as 1.2940 on the back of increased risk appetite and short covering ahead of the G-7 meeting and the prospect of more initiatives from the U.S. government. However, the German GDP reading of a -2.1% ended bullish momentum as it increased the chances of more rate cuts from the ECB.

Talking Points
• Japanese Yen: Tests 91.70
• Pound: Rally’s Ahead OF G-7
• Euro: GDP Contracts Most Since 1995
• US Dollar: U of M On Tap

Euro Gains Capped By Lowest GDP Since 1995, Pound Soars Ahead of G-7

The Euro would reach as high as 1.2940 on the back of increased risk appetite and short covering ahead of the G-7 meeting and the prospect of more initiatives from the U.S. government. However, the German GDP reading of a -2.1% ended bullish momentum as it increased the chances of more rate cuts from the ECB. The deepest contraction in 22 years for the regions largest economy would drag the economic unions growth number down to –1.5%. Euro-zone GDP contracted for the third straight quarter and the most since 1995.

The dour growth numbers has increased the chances that the central bank will cut rates by at least 50 bps at their March meeting. Indeed, ECB executive board members Lucas Papademos, Juergen Stark and Jose Manuel Gonzalez Paramo as well as Spanish central bank Governor Angel Fernandez Ordonez and Belgium Governor Guy Quaden said this week that the bank may cut rates next month. The lower interest rate expectations will continue to be a weighing factor for the Euro, but increasing risk appetite has keep the single currency supported which may keep in stuck in its recent range of 1.2700 – 1.3100 over the near-term.

Then pound soared over 250 bps to as high as 1.4600 on the back of the increasing risk appetite as it erased the majority of the losses it suffered following the BoE’s quarterly inflation report. Indeed, the central bank signaling further rate cuts and the possibility of quantitative easing had sunk Sterling to as low as 1.4150. The 50-Day SMA continues to provide formidable resistance at 1.4650 and may limit anymore upside potential for the pound. The potential of more coordinated efforts to revive the global economy coming from the G-7 meeting has fueled the bullish Sterling sentiment. However, if the current every man for themselves mentality continues post summit then we could see recent gains reversed.

The prospect of a new plan to help stem foreclosures helped reverse market sentiment at the end of the U.S. session and the increase in risk appetite has continued through overnight trading. The mortgage plan and the stimulus plan finally getting passed may be the catalyst to send equity markets higher which could lead to dollar weakness. However, with a three-day weekend ahead traders may be reluctant to become too bullish especially with the G7 meeting scheduled. The gathering of the leaders of the developed nations isn’t expected to focus on currencies but it still provides potential event risk. The U of Michigan consumer confidence report is expected to show that consumers have become les optimistic, which could negatively impact consumer spending going forward. The mounting job losses have led Americans to retrench and their conservative spending habits will remain a weighing factor of domestic growth.

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Related Articles:
Forex Sentiment: Further Euro/US Dollar Losses Likely
German Economy Contracts by the Most in 22 Years

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

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