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Euro Curve Ball More Hot Air?

Written by A Forex View From Afar on Tuesday, August 05, 2008

The F.T. says in an article published today, without quoting an official source, that Germany’s second quarter GDP number will come at -1%. This is breaking news, since it shows that the European powerhouse would have contracted for the first time in the last year, and will raise questions on what the GDP number will actually be that is released on the 14th of August, and whether such a contraction is priced into the current euro price. The question remains how reliable the data is, since the newspaper refuses to divulge its source, but is not the first rumbling of this nature, and points to a slow-down that can be attributed directly to the raising of rates last month, in an effort to fight inflation. All does not look well in the Euro-zone.

If this drop in GDP follows through the euro may have big problems ahead. Over the last seven years the euro reached most analyst estimates, on most releases, whilst the U.S. failed, time and again to get to analyst parity. Now it seems that the wheel had turned and U.S. is the one expanding (relatively), while the Euro-area is floating somewhere between contraction and expansion. Such news has the potential to completely revalue the euro; a negative read at -1% GDP does not justify such a strong currency, the value of all goods and services in the region do not equate at that level to a euro at 1.5550.

On the other side, the IMF (International Monetary Fund) has just published a report keeping the European growth forecasts for 2008 and 2009 unchanged at 1.7% this year and 1.2% next year. Going forward, IMF specialists are divided as to whether the ECB has to raise or keep rates on hold over the medium term. There is a huge void between these numbers, and although one source is reliable, and the other unknown, the IMF have been revaluing forecasts for all of 2008 it seems.

What is sure right now, the incoming data is pretty mixed and the market will need some time to digest it, especially as the FOMC meeting will be added into the dollar valuations. This may be a volatile time ahead as fair value is argued.

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