Guest Post by Angie Picardo
For Forex traders doing business in Europe (and with the Euro), things are not looking good. As of mid-February 2013, the Euro has plummeted as economic growth across the European Union contracts. Many analysts view this contraction nearing crisis levels, which could mean bad news for some forex traders operating in this market.
On February 13th, the British Pound went into tailspin after the release of the Bank of England’s Quarterly Inflation Report. The Euro joined shortly thereafter and fell a full percentage point against the American Dollar. Reports that morning announced that “Not one single aspect of any 4Q’12 GDP data this morning – not on a quarterly or yearly basis, not from France, Italy, Germany, or the broader Euro-zone itself – beat consensus expectations provided by Bloomberg News.”
The lack of proactive measures taken on behalf of European Union leadership means that the Euro-zone is likely to remain in this situation for longer than it really has to, and ultimately leaves its fate in the hands of European Central Bank. This is not a particularly good thing for the EU, especially when it took a mere three months (December 2012 – February 2013) for it to contract by 0.6%. This was the European Union’s fastest decline since 2009, and denotes its third consecutive quarterly economic contraction.
For American traders, the declining Euro means the currency becomes less expensive to purchase, and travel to and within the EU follows. Nevertheless, it does mean that purchased Euros are slightly less valuable than they once were, and the direction this goes in hinges directly on the EU’s economic outcome. For European traders, a strengthening American dollar against the Euro is slightly more expensive, and can be more so given the British Pound and the Euro continue to take nosedives.
Nevertheless, wealthy European traders will continue to enjoy an advantageous position with regard to the American dollar. The United States will still be cheaper for Europeans to travel to (as compared to pre-Euro times) and as such, cheaper to purchase goods and services pegged to the dollar. Indeed, many European firms have invested in, merged with, or bought struggling American companies; some of these include:
- Anheuser-Busch merger with InBev (2008)
- Sanofi-Aventis purchase of Chattem (2010)
- Balda purchase of C Brewer (2013)
- Aberdeen Asset Management purchase of Artio Global Investors (2013)
Big EU economies
The decline in Europe’s GDP meant that France and Germany felt the brunt of the contraction as the two largest economies on the continent. Official data showed that Germany’s GDP contracted by 0.6% on the quarter, indicating its worst performance since the 2008/9 global recession. France fell by 0.3%, and while the contraction was not as large as its German neighbor, this number was worse than forecaster expectations.
What is happening is something of an economic stalemate. Economic problems in the EU will require its stronger members to make proactive choices, fast, and of which will require some sacrifice. This is difficult, however, as stronger members are indeed experiencing their own economic stress in domestic markets.
As Reuters reported, “While the European Central Bank’s pledge to do whatever it takes to save the euro has taken the heat out of the bloc’s debt crisis, even its stronger members are gripped by an economic malaise that could push debt-cutting drives off track.” Nevertheless, “Economists say the euro zone may also shrink in the first quarter of 2013 although more resilient Germany is expected to rebound.”
Going Forward in the Short Term
- The euro zone is to release closely watched preliminary data on manufacturing and service sector activity, while Germany and France are also to publish individual reports. In addition, Spain’s Treasury is to auction 10-year government bonds.
- The U.K. is to release official data on public sector net borrowing as well as a report on industrial order expectations.
- The U.S. is to release official data on consumer price inflation as well as the weekly government report on initial jobless claims. The U.S. is also to publish industry data on existing home sales, a report on manufacturing activity in Philadelphia and official data on crude oil stockpiles.
These each indicate the lackluster effort on behalf of EU governments to induce real change needed to reverse the EU’s economic malaise. Nevertheless, this new data will hold key information that will likely help shape the outlook for the EU in the first half of 2013.
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