Euro drops on record low industrial production and weak Chinese GDP

04-17-2009 16:00

After the publication of the Chinese Gross Domestic Product (GDP) report the euro has fallen gradually, eliminating yesterday’s gains on the growing US stock markets. China´s economic growth dropped to its slowest tempo in almost ten years at 6.1% as a result of further decreasing exports. The world’s third biggest economy has been a source of global growth and declining demand for its products reflects the current weakness of the global economy. Before the EUR/ USD dropped to 1.3130 and found support, it had reached a 1.3270 level. The eurozone industrial production fell in February by 18.4%; a record low, which appended to bearish sentiment due to a 4.3% fall in durable goods. The eurozone CPI of March was proved at 0.6% which will continue deflation worries since it is under the central bank’s target of 2%.

Aggressive measures by ECB ahead

The weakest level of activity since 1986 confirms the EU difficulties as the region continues to indicate weakness. It is possible that the worst recession in 60 years deteriorates further, which is proven by the fact that factories continue to sack work forces in order to reduce costs amidst falling output. The European Central Bank (ECB) starts to consider rigorous actions to restrain the recession. Yesterday, Axel Weber, Governing Council of the ECB, discussed further rate cuts and quantitative easing. He believes that the ECB should follow the Fed and the Bank of England and focus its non-standard measures at banks instead of capital markets. He also disputes rate cuts in order to counteract possible deflationary pressure but stated that a rate below 1% could frustrate interbank lending and may result in more problems. For that reason, it is to be expected that at the next policy meeting the ECB will suggest quantitative easing actions and that a rate cut could be the result of the following meeting.

Fundamental data confirm deteriorating labor market

During last night’s trading the dollar gained as global growth concerns were boosted by China’s weak GDP data. Yesterday the US markets resisted comparable concerns but current optimism fueled the outlook that China would be able to recover sooner than expected. Since this has been doubted the focus will be on the outlook for a recovery of the US economy. In February housing starts surprisingly increased to 583,000 but are expected to fall to 540,000. The first jobless claims are expected to rise from 654,000 to 660,000 and this should increase concerns for economic growth as the fundamentals prove that the labor markets continue to worsen and this will erase any improvement in the housing sector and the global economy. For that reason, it’s likely that the dollar will continue to find support if the internal growth prospects turn out gloomy. Still, an unpredicted improvement in these data together with the forecasted improvement in the Philadelphia Fed manufacturing reading may frustrate present pessimism and affect the dollar. Furthermore, if the JP Morgan Chase earnings report can add to the positive earnings from the banking sector it may boost optimism.