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Friday August 7, 2009 - 14:36:52 GMT
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FX Briefing - Moderate GDP decline in Q2

FX Briefing 7 August 2009


·        GDP drop in the eurozone likely to have slowed significantly in Q2

·        ECB’s monetary policy remains expansionary

·        FOMC set to confirm assessment made in July


Moderate GDP decline in Q2

After a spate of upbeat quarterly earnings in the US, equity markets soared to fresh highs at the beginning of the week. The dollar suffered accordingly. During this phase, improved US economic indicators put it under more pressure: the ISM manufacturing index, for instance, rose over two points to 48.9, and domestic vehicle sales increased sharply, thanks to the “cash for clunkers” programme. All in all, this was enough to lift EUR-USD over the 1.43 mark. On Monday, the euro peaked at 1.4448, but then hovered around 1.44 for most of the week. From Thursday afternoon on, after neither the BoE nor the ECB had provided a decisive impetus, markets took a defensive stance again – in view of the impending US labour market report. The euro tumbled to around 1.4350 against the dollar. The exchange rate reaction to the labour market figures released on Friday was remarkable: the euro dropped below 1.43. That could be a sign that the reaction pattern “good economic data – higher risk appetite – weaker dollar” could be becoming less ingrained.


The rebound in the stock markets had boosted the pound sterling over the last two weeks. Improved economic data, such as various house price indices, the purchasing managers’ index for the manufacturing sector for July and industrial production in June fuelled speculation that the Bank of England might end its asset purchase programme. EUR-GBP thus dropped below 0.85 in the run-up to the monetary policy committee meeting. The UK central bank, however, poured cold water on this idea, with the announcement that it was significantly expanding its gilt purchase programme. In agreement with the Treasury, the Bank of England has decided to pump an additional £50bn into the facility, thus extending it beyond the previous limit of £150bn to £175bn. Against this backdrop, EUR-GBP rose markedly and is now approaching 0.86 again.


The ECB governing council meeting did not have a sustained impact on the forex market. Compared with the previous month, the assessment of growth prospects has improved slightly. The statement emphasizes that the downward movement has slowed noticeably; furthermore, it leaves open the possibility that recovery could set in slightly earlier than hitherto expected. Up to now, the turning point had been seen as around the middle of 2010. The latest statement says that, after a phase of stabilisation, a gradual recovery is expected to set in next year.


Initially, Jean-Claude Trichet’s remarks had a positive impact on the euro. Later on, however, it  became clear that the ECB council’s assessment, although better than before, was still sceptical on the whole – possibly more sceptical than that of market participants. The ECB president pointed out several times that the level of uncertainty remained high and, in a later interview, actually warned against too much optimism. Moreover, Mr Trichet hinted that the expansive monetary policy, and in particular liquidity supply, were set


There is a whole string of important events and economic indicators on next week’s agenda. In the US, the focus is likely to be on the FOMC meeting on Tuesday; we are not expecting it to have a great effect, however. The latest data published are in line with the Fed’s cautiously optimistic assessment in the July Monetary Policy Report. We could envisage the statement giving a slightly more positive assessment of the current situation (“the pace of economic contraction is slowing”), particularly in view of the improved job data, but sticking to its monetary policy stance.


On this side of the pond, all eyes will be on the GDP figures for the second quarter. Next Thursday, in addition to data from Germany and France, the preliminary estimates for the eurozone are being released. Spain and the Netherlands are due to publish their national results on Friday.


Compared with the disastrous results in the first quarter, the drops in GDP are likely to be much more moderate for the most part. On Friday, Italy announced a decline of –0.5% quarter-on-quarter, after –2.7% in Q1. The German figure could be around –0.2% quarter-on-quarter: the drop in production slowed down to 0.8% in Q2; on the demand side, investment in machinery and equipment is expected to have plummeted once more, whereas private consumption, construction investment and even net exports could have made small positive contributions to GDP growth. The French figures will probably be similar. In the eurozone as a whole, GDP is likely to have contracted by 0.3% compared with the previous quarter.


The macroeconomic developments could be deemed to support the euro. We, however, think that markets have already for the most part priced in the idea of stabilisation. As the ECB does not appear to be reacting to the slowing downward momentum either, monetary policy will not for the time being give the euro an additional boost. The stock markets will probably remain the key factor; however, the quarterly earnings season, which had triggered the recent rally, is coming to an end. From that point of view, we could also envisage the euro weakening somewhat in the short term.


Stephan Rieke +49 69 718-4114

Economics Department

+49 69 718-3642

[email protected]

Foreign Exchange Trading

[email protected]

Jörg Isselmann

+49 69 718-2695

Matthias Grabbe / Klaus Näfken

+49 69 718-2688


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