The euro may have finally run out of steam after poor fourth quarter growth data underlined concerns in Europe that the single currency’s sharp rise will harm the region’s economic recovery. Preliminary Q4 GDP reports showed the eurozone economy contracted by more than what markets had expected, and a much deeper recession supported views the European Central Bank may look to respond with monetary policy action in the months ahead. Italy, the euro area’s third biggest economy, shrank by almost four times what most analysts had estimated. Figures from Rome were particularly concerning as they come in front of Italian elections where build-up to the result could prove harmful for the single currency. The US dollar may extend broad-based gains with traders wary of the G20’s currency focus, and after one member of the Federal Reserve put forward the idea of the Federal Reserve reducing the size of its stimulus programme as the US economy gathers momentum.
Sterling
The pound had faced significant pressure, as traders responded to the Bank of England’s inflation report where Governor Mervyn King advocated “exceptionally supportive” monetary policy. The pound’s gains were driven largely by reports signalling the eurozone’s economic recession in fourth quarter was much deeper than expected, encouraging investors to swap the euro for the other currencies.
US dollar
The US dollar saw across-the-board gains after poor growth data from Europe and Japan weighed on market sentiment, turning investors even more cautious in front of a G20 gathering where officials are expected to discuss currency volatility. Investors are also anticipating solid US manufacturing and consumer confidence data to support comments from one Federal Reserve member who discussed the Federal Reserve possibly trimming down its $85bn-a-month stimulus strategy.
Euro
The eurozone economy shrank by 0.6 per cent in the three months through December, worse than the -0.4 per cent expected after being dragged lower by sharper contractions in both Germany and France over the same period. The data highlights concerns at the European Central Bank with the euro’s sharp upswing. Furthermore, the numbers support views that a longer road to economic recovery could see the ECB consider loosening monetary policy in the months ahead. Italy, the region’s third largest economy, reported GDP of -0.9 per cent in the fourth quarter, down from the previous quarter’s -0.2 per cent, ahead of elections in Rome.