FOREX: Germany escapes recession

The only problem with the German GDP is that quarterly 0.1% growth is still extremely low for one of the largest global economies and this is not necessarily going to deter talk away from the prospect of the ECB acting again. In just a few hours, both EU inflation and overall GDP figures are announced, with questions remaining unanswered regarding the EU facing a period of stagnant economic growth. If the Eurozone GDP figure encourages further suspicions that EU economic growth is stagnating, the pressure will remain on the ECB to do more to reinvigorate economic growth. If this occurs, downside pressure would remain on the Eurodollar today.

At the same time, it should not be discounted that the Euro exchange rate has weakened dramatically from the near 1.40 May high, and there has always been optimism that a weaker Euro could positively impact economic data. This has been a slow process, but EU PMIs for October returned to growth for the first time in a number of months and there remains an outside chance that the weaker exchange rate could provide some cheer to the GDP in a few hours. This would not provide the Euro bulls with a platform from which to charge, however, and I maintain that for the Eurodollar to rise above 1.25, it would require US Dollar profit-taking.

Elsewhere, the Cable has continued to drop with investors still closing GBP positions following the Bank of England (BoE) Inflation Report two days ago. Investor appetite towards the GBP weakened substantially when the BoE downgraded economic projections alongside announcing that UK Inflation was set to fall below 1% within the next six months. The GBPUSD fell as low as 1.5653 this morning, which represents a dive of 300 pips from Wednesday’s high (1.5740). It should be noted that the BoE cited EU economic weakness as one of the reasons for the decline in economic forecasts, meaning the GBPUSD would face further downside risks if the market reaction to the EU GDP data is negative.

I remain optimistic, however, that the weaker Euro exchange rate could provide the GDP figure with an unexpected boost. If this does happen, I forecast that the GBPUSD will attempt to re-enter at 1.57. None-the-less, investor appetite for the Sterling is low at present and expectations for a BoE rate rise continue to be held back. If the Cable is going to appreciate any higher than 1.57 anytime soon, it would be due to widespread US Dollar profit-taking.