Euro Consolidates Despite Negative GDP and Flat CPI

Daily Forex Fundamentals | Written by DailyFX | Aug 14 08 10:17 GMT |

Talking Points Japanese Yen: Service Industry Fell Most In Four Months Euro: Growth Contracted In 2Q British Pound: Consolidating around 1.8700 US Dollar: Consumer Prices on tap The Euro saw choppy trading throughout the overnight sessions after bouncing from support at 1.4850. Despite, the European GDP report confirming market expectations that the economy contracted 0.2% in the second quarter from a 0.7% increase the quarter prior, the pair managed to remain above the 1.4900 price level. It was the first decline in growth since the institution of the single currency, led by declines in the regions three biggest economies. Indeed, Germany, France and Italy saw growth fall 0.5%, 0.3% and 0.3% respectively. Meanwhile, inflation declined 0.2% in July and remained flat at 4.0% on an annualized basis as energy costs slowed from 2.7% to 2.6%. The core reading declined as most components were level and communication costs continued its downward trend, falling 2.2%. The European economy may be headed for a hard landing as the ECB continues its focus on price stability. The central bank's quarter point increase in July has accelerated the decline in growth as manufacturers now most contend with higher credit costs in addition to rising raw material prices and slowing demand. Indeed, France saw its non-farm payrolls fall for the first time since 2004 adding to the troubles that the German labor market has been experiencing. This month's German labor report will be critical after last month saw a reduction of 20,000 jobs. If employment conditions continue to worsen, it may force the central bank's hand and lead to a rate reduction sooner than expected. President Trichet's concerns of secondary effects of inflation may be unwarranted as French wages slowed to 0.9% from 1.1% in the first quarter, and with headline inflation remaining flat there may be few obstacles left to prevent future easing. Consumer prices in the U.S. are expected to have risen to 5.2% in July as record level fuel and food costs filter through to other sectors. Inflation has become a concern for the Fed as Americans continue to see their purchasing power erode, which had led to speculation that the central bank could increase rates as soon as their next policy meeting. Yet voting members Richard Fisher- who dissented to keep rates unchanged last meeting- and Gary Stern, recently delivered dour outlooks for the U.S. economy. Traders have significantly reduce their expectations of an increase in interest rates, as Fed fund futures odds of a quarter point hike at the September meeting have fallen to 16% from 54% a month ago. However, a significant increase in consumer prices combined with oil rising back above $117 per gallon on the back of a bigger than expected drop in U.S. gasoline and crude supplies, could lead to dollar strength as interest rate expectations increase. DailyFX Disclaimer Investment in the currency exchange is highly speculative and should only be done with risk capital. Prices rise and fall and past performance is no assurance of future performance. This website is an information site only. Accordingly we make no warranties or guarantees in respect of the content. The publications herein do not take into account the investment objectives, financial situation or particular needs of any particular person. Investors should obtain individual financial advice based on their own particular circumstances before making an investment decision on the basis of the recommendations in this website. While we try to ensure that all of the information provided on this website is kept up-to-date and accurate we accept no responsibility for any use made of the information provided. All intellectual property rights are the property of Daily FX. Daily FX and its affiliates, will not be held responsible for the reliability or accuracy of the information available on this site. The content herein is provided in good faith and believed to be accurate, however, there are no explicit or implicit warranties of accuracy or timeliness made by Daily FX or its affiliates. The reader agrees not to hold Daily FX or any of its affiliates liable for decisions that are based on information from this website. Daily FX highly recommends that before making a decision, the reader collects several opinions related to the decision and verifies facts from at least several independent sources.