Euro Zone Gross Domestic Product - Economic Data Preview

The second revision of [B]Euro Zone Gross Domestic Product[/B] is expected to confirm that the currency bloc’s economy shrank -2.5% through the first quarter, the largest drop since the creation of the single currency. The outlook going forward is decidedly ominous: a survey of economists conducted by Bloomberg expects inflation-adjusted GDP to shrink by a whopping -4.2% this year, greatly overwhelming calls for a -2.8% drop in the United States. Looking further out to 2010, the onset of economic recovery is set to see GDP growth in the States outpacing that of the Euro region by 1.4%. On balance, this suggests the European Central Bank is likely to lag behind the US Federal Reserve in raising interest rates as the rebound materializes, hinting at a bearish long-term bias for EURUSD.

Indeed, the ECB has been notably more reserved than most of its major counterparts in offering monetary stimulus. Although ECB President Jean-Claude Trichet announced that the bank would move forward on quantitative easing with a scheme to “purchase euro-denominated covered bonds issued in the euro area,” details of the program (and thereby its actual commencement) have been delayed at least until the next policy meeting on June 4th. Such waffling may see the single currency punished in the weeks and months ahead as traders price in not only a longer path to recovery but also the political implications of inaction. Indeed, grumbling electorates are increasingly likely to entertain calls to free national monetary capabilities from the ECB’s “measured approach” as recession deepens and unemployment levels rise, threatening the very existence of the currency union itself.