The European Commission lowered their growth forecast to 1.3% from 1.7% for the Euro-Zone, and expects Germany and Spain to slip into a technical recession later this year. They also noted that economic activity for France and Italy will remain subdued for the rest of 2008, heightening growth concerns for the 15 European nations.
Talking Points
• Japanese Yen: Fading Risk Appetite Pushes USDJPY Below 107.00
• Pound: Inflation Expectations Hits New High – Pound Breaks Below 1.75
• Euro: Dips Below 1.39 As Recessionary Fears Loom
• US Dollar: Trade Balance and Import Prices on Tap
ECB Holds Hawkish Outlook, Euro Dips Below 1.39
The European Commission lowered their growth forecast to 1.3% from 1.7% for the Euro-Zone, and expects Germany and Spain to slip into a technical recession later this year. They also noted that economic activity for France and Italy will remain subdued for the rest of 2008, heightening growth concerns for the 15 European nations. Despite the dour outlook held by the commission, ECB Governing Council member Axel Weber dissented on the views, stating that ‘there is no need to see the medium-term outlook in an overly gloomy light or even raise the specter of a deep recession.’ He did however, note that ‘the German economy has to get through a dry spell in the coming months,’ due to the downturn in the global economy. Meanwhile, the commission raised their inflation outlook to 3.6% from 3.1%, stating that the second-round effects on inflation could materialize over the coming months. Furthermore, the ECB bulletin said the inflation remains at a ‘worrying level,’ noting that upside prices pressures will likely keep inflation above the central bank’s 2% target until 2010.
Amid the hawkish outlook held by the ECB and the European Commission, the comments failed to support a rally in the Euro. In fact, the Euro dipped below 1.39 against the U.S. dollar for the first time in a year. The strong downtrend clearly represents that market participants continue to hold a bearish outlook for the Euro, which could lead the European currency to fall further as the ECB holds a neutral policy stance going forward.
The BoE’s August Inflation Attitudes Survey showed that the inflation expectations soared to a new record high of 4.4% from 4.3% in May. Furthermore, BoE Governor Mervyn King said that the recent depreciation of the British Pound may fuel upside inflation risks going forward, which suggests that the MPC will not lower the benchmark interest rate until next year. The hawkish rhetoric by the BoE however, did little to boost the British pound as it fell below 1.75 against the U.S. dollar.
Falling oil prices paired with the dour outlook for European economies should help to boost the U.S. dollar as the economic docket remains light. The U.S. trade deficit is expected to widen to -$58.0B from -$56.8B in June as oil prices peaked to a record high in July. Accordingly, the import price index is anticipated to fall back from its record high reading of 21.6% in July to 20.2% in August.
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