EUR/USD continues to struggle, as the pair tests the 1.31 line in Monday’s European session. The euro has lost close to three cents since Wednesday, when the US Federal Reserve announced that it plans to taper the current QE program sometime in 2013. It’s a quiet start to the week, with only two releases on Monday. German Ifo Business Climate, a key event was slightly lower than the estimate. Belgium NBB Business Climate will be released later. There are no US releases on Monday.
The US dollar got a strong boost last week, as Federal Reserve chair Bernard Bernanke signaled that QE would likely be scaled down in 2013, and could be terminated in 2014, if growth and employment numbers continue to improve The Fed said that it expects the economy to grow and unemployment to fall, which will allow the scaling back of QE. It should be remembered that the Federal Reserve is not making any changes at present to QE, which involves bond purchases of $85 billion each month by the Fed. Bernanke’s comments bolstered the dollar against the major currencies, as winding up QE is dollar-positive.
German numbers continue to raise concerns in the markets. Long considered the locomotive of Europe, the largest economy in the Eurozone continues to churn out weak data. Last week, German Manufacturing PMI remained under the 50-point level, indicating contraction in the manufacturing sector. German PPI also disappointed, posting a decline of -0.3%. On Monday, German Ifo Business Climate, a key indicator, came in at 105.9 points, just short of the estimate of 106.0. These numbers point to weakness in the German we economy, and If Germany does not lead the way to recovery, the Eurozone will have a very tough time pulling out of the current recession.
Last week, ECB President Mario Draghi stated that he is open to “non-standard” monetary tools, and would consider their implementation if needed. Non-standard measures include negative deposit rates, long-term lending operations and modifying collateral requirements. Draghi has managed to steer the Eurozone through the worst of the debt crisis, but the zone remains stuck in its longest recession since its creation in 1999. If the ECB does take action and introduces negative rates or other non-standard measures, we could see a sharp reaction from the currency markets. Recently, Draghi and other ECB policymakers floated the idea of negative deposit rates, and the euro lost ground as a result.
The Eurozone economy continues to be hampered by low growth, and much of the problem is due to low inflation and high unemployment. Although inflation indicators have been pointing higher, inflation remains well below the ECB’s target of 2%. The ECB recently lowered interest rates to 0.50% in an attempt to raise inflation and increase economic activity, but so far we haven’t seen much improvement. The labor market situation continues to look grim. Unemployment in the Eurozone has risen to 12%, and is much higher among younger Europeans and in southern countries such as Spain and Greece. The persistent unemployment crisis has led policymakers to declare that the Eurozone unity faces more danger from a social breakdown than from any market forces. With a severe recession affecting many member countries, both small and large, politicians and policymakers will have to find a way to reduce the severe growth and unemployment problems facing the Eurozone if it is to recover from a tough recession.
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