Daily Economic Commentary: Euro zone

Trading Discussion News and Economy
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After struggling to knock out the greenback in yesterday’s match, the euro suffered a painful blow when EU officials announced that no direct aid will be given to remedy Greece’s debt problems. The EURUSD crashed by more than 100 pips a few hours after the announcement while the EURJPY was unable to hold on to the 124.00 handle.

  According to European Council President Herman Van Rompuy, Greece  won’t be given any special treatment but European governments are ready  to assist the country if necessary. Furthermore, he mentioned that the  European Commission and the [European Central Bank](http://www.babypips.com/forexpedia/European_Central_Bank) will monitor Greece’s  budget cutting efforts and reassess whether they would require external  aid in March.   I wonder how long will they wait for the situation to  worsen until they finally acknowledge that Greece is in dire need of  help… and it seems like traders were thinking along the same lines as I  am! Heck, the debt situation could get too hot for EU officials to  handle before they actually decide to do so.

  Meanwhile, the only economic report released from the euro zone  yesterday revealed that Germany’s wholesale prices surged by 1.3% in  January. Although the actual figure outpaced the consensus of a mere  0.1% uptick, the upbeat sentiment for euro zone’s largest economy was  soon drowned out by the EU officials’ decision to keep their hands off  Greece’s debt troubles. 

  Looking ahead, the euro could be in for a wild today since it’s [GDP](http://www.babypips.com/forexpedia/Gross_Domestic_Product) day! The GDP party  kicks off at 7:00 am GMT so make sure you’re  up to speed. Germany, euro zone’s largest economy, heads the pack in  releasing their GDP report, which could print a  0.2% economic expansion for the fourth quarter of 2009. If the actual  figure misses the consensus, the euro could suffer another beating,  considering how the GDP estimate is already a  step down from the previous quarter’s 0.7% GDP  growth. Next up, France could post a 0.5% increase in GDP, higher than the third quarter’s 0.3% expansion.  Overall, this could bring the euro zone’s GDP  up by another 0.4% for the quarter. 

  Also due today are the French non-farm payrolls report and euro  zone’s industrial production data. France could report a 0.2% decrease  in employment for the fourth quarter of 2009, following a 0.6% drop seen  in the third quarter. Meanwhile, euro zone’s industrial production is  slated to rise by 0.3% in December after climbing by 1.0% in November.  Watch out for the actual report at 10:00 am GMT.

  Don’t forget to keep an eye out for the release of the US retail  sales report at 1:30 pm GMT since this could  also spice up the EURUSD price action for  today. Be careful out there!
165

The euro checked in the heart break hotel last Friday as it got snubbed by the dollar and yen. The EURUSD slid and closed at 1.3617 from 1.3683. Similarly, the EURJPY also closed lower at 122.54 from 122.77.

Germany’s 4Q GDP came in at a disappointing 0.1%. Imagine, with all the supposed holiday spending and all, the economy still barely grew. The economic situation in the euro zone is not getting any better. First it’s the Greek debt issue and now this. How can we expect Germany to comfortably give a helping hand on Greece given a very weak economic output? Germany then might have to reach deep inside their pockets if they still choose to.

The euro fell following the report. However, it was able to make back its losses as traders soon bought it again given the better-than-expected US retail sales figures.

This week will kick off for the euro zone with the release of Germany’s and euro zone’s Zew economic sentiment survey tomorrow (February 16). Both indexes are seen to slip in February given the uncertainties regarding Greece debt issue and just recently, Germany’s weak economic performance. Germany’s account is projected to slide to 42.5 from 47.2. The euro zone’s number is also anticipated to retreat back to 42.6 from 46.4. These weak projections could add more selling pressure on the euro.

On Friday, Germany’s, euro zone’s, and France’s services and manufacturing PMIs will be on deck. The indexes are projected to log in some mixed results. Germany’s January PPI, which is seen to post a 0.4% gain after previously falling by 0.1%, will likewise be due. On tap during the same day is the euro zone’s current account balance in December as well. December’s account is projected to have backpedaled to - €0.6 billion from €0.1 billion.

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What a snoozer yesterday was! The most traded and liquid currency pair of all, the EURUSD, failed to make any significant moves, as it just bounced around a tight 50-pip range. It closed the US session at 1.3600, just a mere eight pips lower from its week open price.

No significant economic data was released yesterday but do expect the German ZEW economic sentiment survey at 10:00 am GMT. It is predicted to print a reading of 42.5 for this month, lower than 47.2 reading seen in January. Even though it is lower, it is still greater than base line zero, indicating that survey respondents remain optimistic about Germany’s economy. Given the current worries on Greece’s debt, I suspect that if the the actual reading comes in lower than forecast, we’d see the EURUSD tumble down to a new yearly low…

In any case, it might be best to buckle your forex seat belts today as US will be coming out of its long holiday weekend. Trading volatilty could pick up today and come out in full force!

167

Despite some mixed data from the euro zone, the euro propped up yesterday, as risk appetite came back into play during the US session. The EURUSD soared higher to close at 1.3768, erasing more than half of its losses from last week.

The mixed data that I am referring to are the ZEW economic sentiment reports. The German edition came out to beat expectations of a reading of 45.2 to print a score of 47.2. This indicates that sentiment amongst German investors has improved.

However, the euro zone edition scored just a 40.2 after it was expected to have a reading of 46.4. This probably has a lot to do with Greece’s problem, which is the main issue plaguing the euro zone. There are a lot of concerns right now, as some suggest that Greece needs help, while others say otherwise. Until the uncertainty on whether or not Greece really needs help dies down, this could continue to be an underlying problem that may lead to euro weakness down the line.

Not much high impact news over the next couple of days. Watch out for degrees of risk sentiment – if risk appetite continues to grow, yesterday’s rally across the market may just be sustained.

168

Another one bites the dust! As debt concerns, this time from Italy, resurfaced in the euro zone, the EURUSD plummeted by almost 200 pips from a high of 1.3790 to the 1.3600 area.

The debt spotlight shifted from Greece to Italy, which has been dubbed by Nobel Prize winner Robert Mundell as the biggest threat to the euro zone. The IMF, which projected that Greece’s debt would reach 108% of its GDP, also estimated that Italy’s debt would amount to 120% of its GDP. Uh oh… An excessively high debt level in euro zone’s fourth largest economy could weigh down the entire region. In fact, Italy’s debt, which is more than five times that of Greece, is equivalent to 25% of the entire euro zone’s debt.

On a lighter note, euro zone’s trade balance came in better than expected, printing a surplus of 7.0 billion EUR, up from the previously reported 5.3 billion EUR trade surplus. This increase was brought about by strong exportgrowth of 3.1%, outpacing imports which grew by 1.7% since November. This brings the 2009 trade balance to 22.3 billion EUR, a rebound from the deficit of 54.7 billion EUR in 2008. Still, the upbeat sentiment accompanying this report was overshadowed by Mundell’s words of caution.

Euro zone’s economic calendar is empty today, leaving traders ruminating on the gravity of Italy’s ballooning debt. With Mundell also warning that the euro zone can’t afford a further appreciation of the EUR, traders might just take this as a sign to keep dumping the EUR.

169

It was a wild roller coaster ride for the euro yesterday. The euro got some boost when the US PPI and Philadelphia Fed index showed some better-than-expected results. It then gave its gains back mid through the US session. Still, it was able to edge the dollar by a measly 4 pips to end the day.

Euro zone’s economic calendar was report-free yesterday. Earlier today, though, the euro got hacked by the greenback when the Fed made its announcement that it would raise its discount rate to 0.75% from 0.50% effective today. The Fed reasoned that this move will encourage the financial institutions to lean more on the money markets than on the central bank. This, of course, triggered some concerns that the global economic growth will slow down, leading the investors running back to the safety of the dollar.

A bunch of mid tier economic data will be issued today in the euro zone. First up is the German January PPI which will be released at 7:00 am GMT. Due at 8:00 am GMT are the services and manufacturing PMIs of France, Germany, and the euro zone. Most PMIs are seen to post modest improvements for the month of February though the euro zone’s current debt concerns might negatively reflect on the indexes. Also scheduled later at 9:00 am GMT is the euro zone’s current account balance which is projected to have declined to -€0.6 billion in December from €0.1 billion.

Weak figures from these accounts could place some additional selling pressure on the euro.

170

After its wacky roller coaster ride the preceding day, the EURUSD was able to stabilize and clock in some gains last Friday. The EURUSD closed out Friday at 1.3594, just a few pips lower from its week open price.

Economic data released last Friday was mostly positive, giving the EURUSD some much needed support.

The German January producer price index showed that the price of goods sold by manufacturers climbed 0.8%, double the initial forecast. The PPI is usually used as a leading indicator of inflation because businesses tend to pass on additional costs they incur to their customers.

Meanwhile, the current account balancecame with a strong €1.9 billion surplus, beating the €600 million deficit consensus.

Euro zone’s manufacturing PMI also came out better-than-expected. It printed a reading of 54.1, higher than the forecast and January’s revised up 52.4 reading. That marked the fifth month the manufacturing PMI was above the base line 50.0 mark that divided growth from contraction.

However, not all were optimistic as euro zone’s services PMI edged down to 52.0 from 52.5 in January, indicating that there was unbalanced growth in euro zone’s economy.

Looking ahead the week, the only top tier economic report due is the German Ifo Business Climate survey tomorrow at 9:00 am GMT. The survey asks what wholesalers, retailers, manufactures and other businesses think about the Germany’s economic conditions and outlook. The survey is predicted to print a reading of 96.3 this month, slightly higher than the 95.8 reading seen in January.

171

Pretty quiet day as US traders had a day off due to the banking holiday. The EURUSD traded slightly lower after gapping up over the weekend to close at 1.3600.

We should see more movement today as German Ifo Business Climate index is due later today at 9:30 am GMT. The index measures business confidence of manufacturers, wholesalers and retailers. Word on the street is that the index will post a reading of 96.2, slightly higher than last month’s score of 95.8. This shouldn’t come as much of a surprise – Germany’s manufacturing sector has been doing relatively well.

Still, I don’t think the report will give the euro too much of a boost as traders are still waiting for more news out of Greece. With growing concerns regarding Greece’s ability to handle their debt, we could see more euro weakness unless European leaders come out with concrete plans for aid.

Tomorrow, some 2nd tier reports are due, with the GFK German Consumer Climate index scheduled for release at 7:00 am GMT, while industrial new orders data is due later at 2:00 pm GMT. German consumer confidence is expected to remain steady, while industrial new orders are projected to have fallen by 1.2% in December. If these figures come out worse than expected, we could see the euro continue its slump.

172

“Sooner or later it all comes crashing down, crashing down…” sang the EUR yesterday as it tumbled by almost 200 pips against the USD. An unhealthy combination of risk aversion and weak economic data from the euro zone also caused the EURJPY to plummet from a high of 124.55 to the 122.00 area.

According to the German Ifo business climate report, business confidence slipped from 95.8 to 95.2 in February as Greece’s debt problems weighed down the sentiment for the entire euro zone. Aside from that, the cold weather reportedly hampered construction and retail activity during the month. This drop was unexpected since the consensus was that the reading would rise to 96.2. Ifo President Hans-Werner Sinn mentioned that business activity is expected to pick up once the winter season ends.

Meanwhile, euro zone’s second largest economy also had its share of feeble economic data. France reported a 2.7% drop in consumer spending for January, much worse than the forecast of a 0.6% decline. The dismal figure for January was seen to be a result of the French government’s trimming of their car subsidy program.

But wait, there’s more! Belgium wasn’t spared from suffering from bleak economic figures as well. Based on its NBB business climate report, business morale stalled at -7.0 in February, failing to meet the estimate at -4.9.

Around the time of the release of those reports the EUR was already sliding down but the US consumer confidence report even added insult to injury. According to the Conference Board, the index of consumer confidence fell from 56.5 to 46.0, its weakest level since April last year. This caused a run of risk aversion, which led investors back to the safe-haven currencies and away from higher-yielders such as the EUR.

The euro zone’s economic schedule looks filled to the brim for today. First, there’s the GfK German consumer climate report due at 7:00 am GMT. This could show that consumer confidence fell in February, from 3.2 to 3.1. Next, the German final GDP for the fourth quarter will be released. This could confirm that economic growth stayed flat during the quarter. At 10:00 am GMT, the industrial new orders report for the euro zone will be released. It could show that orders fell by 1.1% in December after rising by 2.7% in November. Worse than expected figures could push the EUR even lower, considering how the outlook for the euro zone is already bearish.

173

Trading of the euro became a little volatile during the time the FOMC released its statement. There, the FOMC said that it will keep its current policies as is for an extended period given the subdued outlook in the US’s economic growth and inflation. Still, the EURUSD was able to close higher at 1.3534 from 1.3501.

The GfK German consumer climate index fall for the fifth month to 3.2 in March from 3.3 as consumers tighten their spending given Germany’s still weak employment outlook. New industrial orders for the entire euro zone, on the other hand, rose again by 0.8% in December on top of the 2.7% gain during the month prior.

The euro remained flat and constrained within a tight range even after the release of the accounts above.

Later at 8:55 am GMT, the German unemployment change in January will be issued. Firms in Germany are seen to slash about 18,000 more jobs in February on top of the 6,000 ones that they did during the previous month. Such of course reflects negatively on the German economy and the euro zone as a whole.

Meanwhile, the change total money (EUR) in circulation in the euro zone for the month of January from a year earlier, which is seen to increase by 0.1% after a decline of 0.2%, will be released at 8:55 pm GMT as well. An increase in circulated money usually leads to higher spending and inflation. Such could then be bullish for the currency.

174

The EURUSD went into see-saw mode yesterday, losing quite a bit of ground during the Asian session but eventually fought back, ending the US session right where it started.

The initial blow to the euro’s value came from Greece’s debt problems. Hah, no surprise there. Apparently, Greek unions staged a strike yesterday to show their opposite to the government’s plans to cut spending, which inevitably caused another round of risk aversion.

Moreover, Greece’s Deputy Prime Minister released some bold, below the belt comments at Germany. He said that Germany had no right to criticize Greece’s economic standing, especially since they took so much from Greece during the Nazi occupation. As if that wasn’t enough, the Prime Minister went on and said that the European Unions were of “poor quality.”

I don’t know about you but I think the longer this Greece debt soap opera drags on, the greater probability things will get ugly.

News from the economic front was somewhat positive though. The German unemployment change that was released yesterday showed that 7,000 net jobs were shed in January instead of the 18,000 losses initially expected. Meanwhile, the M3 money supply report, which measures the total change of money in circulation in euro zone, was right in line with expectations showing a 0.1% increase.

On the docket today is Germany’s preliminary consumer price index (CPI) reading for this month. The CPI is measures the total change percentage in the price of consumer goods and services in a given period. The forecast is a 0.5% increase, opposite the 0.6% decline seen in January.

At 10:00 am GMT, euro zone’s CPI will also be released. The forecast is another 1.0% increase for the month of January. If the actual figure comes in lower, we could see another round of euro selling.

So that’s about it for the euro zone… A little bit of event risk, but nothing major. It’s a different story for the US though, as the preliminary GDP and the existing home sales are due. Watch out for those!

175

Risk aversion came back into play, pushing the euro lower against the greenback and the yen yesterday. Although most euro zone reports came in better than expected, the EURUSD fell to a low of 1.3461 during the US session.

German import prices surged by 1.7% in January, outpacing the estimated 0.8% increase and December’s 0.7% uptick. Core import prices rose 1.1% during the month and are expected to climb higher in the near term. Meanwhile, euro zone’s overall unemployment rate stood steady at 9.9% instead of climbing to 10.1%. This was considered good news since it reflects a monthly slowdown in job losses. These upbeat reports enabled the EURUSD to keep its head above the 1.3600 level.

However, once the US started churning out bleak economic figures, investors decided against pursuing riskier assets and fled to the safe-havens instead. Apart from that, the ongoing Greek debt problems further weighed the euro down. Apparently, EU Monetary Chief Olli Rehn still isn’t happy with the proposed bail-out plan for Greece… Argh! When will this Greek drama end?

Today’s economic docket holds a few low-key reports from the euro zone. At 10:00 am GMT, the CPI flash estimate for the entire euro zone will be released. It could show that price levels are still expected to rise by an annualized 1.0%. Also due then are Italy’s preliminary CPI and euro zone’s PPI. Aside from those, keep a lookout for further developments in Greece’s debt situation since this could dictate the direction of the euro pairs today.

176

Some risk taking allowed the Euro to recover some of its Monday losses versus the greenback yesterday. The EURUSD initially fell but found some support at 1.3500 to finish higher at 1.3608.

Euro zone’s annualized CPI in February came in softer than expected at 0.9% which is lower than the 1.0% estimate and the 1.0% score in January. While a relatively weaker inflation figure is usually bearish for the country’s respective currency, the EUR still managed to trade on a positive note.

A couple of other low tier economic issues were published namely Italy’s CPI and the euro zone’s PPI. Italy’s CPI in February also came in below the 0.3% forecast with a 0.1% mark. The euro zone’s PPI, on the other hand, came in on target at 0.7% in January. None of these accounts, however, had a major impact on the Euro’s short term valuation.

Today, both Germany’s and the euro zone’s retail sales figures are due at 7:00 am GMT and 10:00 am GMT, respectively. German retail sales are seen to have slipped by 0.5% in January after logging in a 0.9% gain in the month prior. Adverse winter conditions could have affected the retail consumption at those times. Since Germany takes up about a third of the whole euro zone’s economic activity, such a slide German sales could have a big impact on the entire euro zone. For the same period, the euro zone’s retail sales are projected to have declined by 0.3% as well after posting a 0.1% gain in December. A slide in retail sales could reflect negatively on the economy and on the EUR.

177

The euro proved to be the alpha-currency in yesterday’s trading session as it pulled back just a few pips below the 1.3700 region. The upward move was all thanks to news about Greece… Again.

Apparently, Greece came out with a plan yesterday to cut its deficit further by 6.5 billion dollars, easing investor concerns about the country’s debt problem. Greece announced that they will be raising taxes and cutting the salaries of civil servants in order to reduce their debt to 8.7% of its GDP. Take note that this is just a plan, so unless we see some concrete actions, the EURUSD’s gains will be capped.

Germany’s retail sales report released yesterday beat expectations. Instead of printing a 0.5% decline in sales, the report showed came out with a flat reading, indicating that there was no change in sales between December and January. However, the retail sales report for the entire euro zone covering the same period showed a decline of 0.3%, opposite the revised up 0.5% seen the period before.

All eyes will be on the ECB today as they are set to announce their decision on euro zone’s benchmark interest rates at 12:45 pm GMT. The bank is widely expected to keep rates unchanged at 1.00% so currency traders will be shifting their focus on the accompanying statement the press conference 45 minutes later. Hawkish comments, meaning any hints of a rate hike in the future, would probably send the euro to soaring.

178

A day after posting some nice gains, the euro got burned once again in yesterdays trading session. The EURUSD erased its winnings by closing a 100 pips lower at 1.3596.

The euro fell yesterday as ECB President Jean Claude Trichet made some disappointing statements during the ECB statement. Trichet didn’t say that the ECB would have Greece’s back, sticking to the ECB’s policy that Greece should figure out their debt problems on their own. He even went as far as to say that it would be inappropriate for the IMF to help out Greece.

Of course, the ECB wouldn’t want the IMF to stick their head into this mess. Why? It would signal that the ECB is unable to handle the problems of the EU’s member nations. Now, will the IMF intervene? We will have to wait and see.

Anyway, going back to the rate decision, the ECB kept the base interest rate at 1.0% but did phase out other monetary tools. It appears that the base rate will be kept until October later this year.

Germany factory orders on deck today at 11:00 am GMT, with expectations being that orders rose by 1.6% in January. Still, don’t expect this to give the euro any support as traders may sit tight ahead of the US NFP report coming out in the US session.

179

The Euro logged in wins against the ‘safer’ Dollar and Yen last Friday following a better-than-expected US NFP employment change. The EURUSD slightly rose to 1.3620 from 1.3590. The EURJPY, on the other hand, soared to 123.07 from 121.11.

German factory orders surprisingly expanded by 4.3% in January versus a 1.6% forecast after falling by 1.6% in December. The Euro, however, remained flat despite the bullish result as investors prepared ahead of the US NFP report that was going to be released later during the US session.

As mentioned, risk appetite made a return and the investors bought up the anti-dollars like the Euro following a better-than-expected NFP employment change. Firms in the US only slashed about 36,000 jobs against the 56,000 estimate.

This week will kick off for the EUR with the release of the euro zone Sentix investor confidence index today at 9:30 am GMT and German industrial production at 11:00 am GMT. Investor confidence in the euro zone is seen to improve to -8.0 in March from -8.2 while Germany’s industrial production is projected to have increased by 1.1% in January after declining by 2.6% in the month prior.

On Wednesday, Germany’s January trade balance and February CPI will be on deck. Germany’s trade likely remained flat at €16.7 billion. The country’s final m/m CPI is also seen to have stayed the same at 0.2% in February.

On Friday, euro zone’s industrial production, which is projected to have gained by 0.8% from December up to January, will be on tap. Germany’s industrial production, which will be due earlier, could serve as an outside look on the overall performance of the euro zone. An increase there could likewise translate to a positive result for the euro zone.

180

The Euro closed flat against the dollar and yen yesterday due to a lack of economic reports in the euro zone and the US. The EURUSD booked a pip by closing at 1.3631 after reaching a high of 1.3705 from 1.3630. The EURJPY, on the other hand, fell slightly to 123.08 from 123.26.

Germany’s industrial production came in a little weaker-than-expected at 0.6% versus the 1.1% estimate in January. The result caused the Euro to fall back from its daily high.

Expect today’s trading to be listless as well as no major reports are scheduled in both the euro zone and the US. The Euro’s overbought condition, however, could place some selling pressure on it.

181

Due to risk aversion, the euro found itself struggling to hold its ground against the dollar in yesterday’s trading session. The suspect? Downbeat comments from three time Greek Prime Minister George Papandreau!

Mr. George said yesterday that the debt problems Greece is experiencing could spread to the rest of Europe and lead to a weaker euro. He also said that the Greek debt crisis has some serious implications on the US dollar, which was taken by traders as a sign to buy the dollar!

To recap… No important data released yesterday yet the euro fell during the European trading session on the Prime Minister’s comments. The currency managed to retrace some of its losses within the day though, to close out the US trading session at 1.3600.

On the docket today are some economic, like the Italian and French industrial data, but nothing really that would garner the attention of currency traders. I’d keep an ear out for ECB President Jean-Claude Trichet’s speech at 6:00 pm GMT later today though. If he starts talking down Greece’s debt problems (a.k.a. G-bombs) again, we could see the euro get back the ground it lost yesterday.

182

Once again, the EURUSD was stuck within a range, as it has for the better part of a trading week now. With not much high impact data coming out yesterday, the pair finished higher at 1.3651.

Italian and French industrial production figures came in better than expected printing rises of 2.6% and 1.6% respectively. Consensus was for increases in industrial production last January by 0.7% and 0.3%. But as I said, this didn’t catch the eye of currency traders yesterday, as the relatively good news failed to spur any significant euro buying.

ECB President Jean Claude Trichet and comprade Axel Weber (another ECB member) both delivered speeches yesterday, although they didn’t really say anything that rocked the markets.

We may see another quiet day of trading, with only the ECB monthly bulletin on deck at 9:00 am GMT. This report may reveal more insight as to what ECB members have been discussing regarding monetary policy.

183

Consolidation was the name of the game for the EURUSD yesterday as it hovered between 1.3625 to 1.3680. The EURJPY pair, which was unable to break above 124.00, was range-bound as well.

Despite a few downbeat remarks in the ECB monthly bulletin, the EUR was able to hold on to its recent gains as strong economic figures provided support. France reported better than expected non-farm payrolls figures, printing a decline of 0.1% in the number of employed people for the fourth quarter instead of the expected 0.4% slide. Meanwhile, the French government budget balance reportedly narrowed from a deficit of 138.0 billion EUR to 9.2 billion EUR in January.

The ECB reiterated their cautious monetary policy stance by saying that the current level of interest rates is appropriate and that they won’t start tightening their policies unless the risks of sovereign defaults are gone.

Industrial production figures are on tap 10:00 am GMT today. The report could print a 0.8% rebound in industrial production, following the 1.6% decline seen last December. If the actual figure beats the consensus, the EUR pairs could bust out of their current ranges.

Keep an eye out for the release of the US retail sales report at 1:30 pm GMT today since this could have a huge impact on risk sentiment. If the actual report comes out worse than the projected 0.1% decline, risk aversion could dampen demand for the higher-yielding EUR.