Tough Week For The Euro
It’s been a tough end to the week for the euro, with soft growth in eurozone Gross Domestic Product (GDP) during the first quarter revealed on Thursday, followed by a sell-off on Friday in Greek bonds.
By Peter Martin
Friday, May 16, 2014
Eurozone GDP grew at just 0.2% in the first quarter of the year, according to the flash estimate from Eurostat, which was released on Thursday. This was beneath the consensus estimate of 0.4% and takes year-on-year growth to a still-sluggish 0.9% after 0.5% in the previous quarter. With European Central Bank (ECB) President Mario Draghi having dropped hints that action could be taken by the central bank at its June monetary policy meeting, this latest result will, if anything, have boosted expectations of further stimulus measures.
While the ECB remains most concerned over low inflation, the softness of the economic recovery, particularly in France and Italy where no growth was reported, is unlikely to produce any inflationary pressures. Merchandise trade data released on Friday provides some background detail, with exports declining 0.5% in March which will have been a contributing element in the weakness of the first quarter recovery. The ECB governing council is set to meet on June 5 and although the exchange rate of the euro is not an explicit policy target of the central bank, the fact remains that despite pulling back from multi-year highs against the dollar since the last ECB meeting, a stronger euro and its effects on constraining exports amidst a low inflation environment will remain a serious concern.
In Greece, yields on 10-year bonds rose 5 basis points, despite the Greek government denying on Thursday that it had introduced retroactive taxation on foreign holders of Greek government bonds. Local elections are to be held in Greece this weekend with European elections the weekend after, adding to the uncertainty surrounding the euro at the moment.
By early afternoon in New York, the euro was down 0.07% against the dollar at $.13700, on course at these levels for a decline on the week of around 0.4%. The dollar weakened against the yen and the British pound on Friday, despite some US housing data that was upbeat at the headline level. Housing starts jumped 13.2% in April, rising to a seasonally-adjusted annualized rate of 1.072 million from 947,000 in March, which exceeded expectations by some margin. The gains were nearly all in the multi-family component, however, with single-family homes creeping up just 0.8%, pointing to demand from renters for apartment buildings driving the growth. Permits gained 8.0%, but once again this was caused by strength in the multi-family component, with permits actually declining for single-family homes.
Overall, the report does point to spring weather providing a boost to housing construction, but any optimism from the housing report was overshadowed by signs that consumer sentiment is in decline. The University of Michigan’s mid-month reading of its index of consumer sentiment came in at 81.8, compared to the 82.6 seen in April’s preliminary reading and April’s final level of 84.1. Both the current conditions and expectations components dropped, which does not bode well for consumer spending this month. By early afternoon in New York, GBP/USD was up 0.24% at $1.6830, while USD/JPY was down 0.13% at Y101.45.
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