Week in FX Europe – German Growth Concerns Rise As European Engine Stalls

• German ZEW Drops into Negative Territory
• UK Inflation drops to 1.5%
• BoE Chief Economist gloomier about UK Economy

Germany’s ZEW Institute released its monthly survey falling into negative territory. The financial analysts who participate are not optimistic and could hint an upcoming contraction in the third quarter. The EUR/USD was trading below 1.27 and expected to head lower awaiting US retail sales. What happened next could very well define what colour ink do investors use to describe 2014. A weaker than expected US retail sales figures spooked investors into a sell off that saw the EUR/USD pair break above 1.28 as safe haven flows took over and European bond yields went their own way. German bunds were favoured, but Spanish, Italian and Greek debt came very close to crisis levels.

It took strong corporate earnings and strong US employment and housing data to reverse the trend before the end of the week. Questions remain about how deep is the economic malaise in Germany. There is no denying that the economic fundamentals of the nation are strong, but as it faces a stand off with the rest of Europe over austerity, it is hard to see how Europe as a whole can break away from stagnation.

The Bank of England was proving the be the only central bank that could be counted along with the US Federal Reserve for a possible rate hike in 2014. Now that seems to be out of the table as global economic conditions have worsened and growth forecasts cut. The UK inflation fell to 1.2%, a five year low, making very unlikely that the BOE will raise rates this year. To make the matter more clear the Bank’s Chief Economist is saying he has changed his mind on when to hike. He described a “gloomier” outlook on the economy given the latest inflation figures. A Reuters poll still finds high probability of a first quarter hike next year amongst analysts.

Next week in Europe

The drop in US retail sales along other geopolitical events trigged a wave of uncertainty across the globe. Stock markets and emerging market currencies were the biggest losers as the US economy was thought to be slowing down. The last two days of the week calmed investor’s nerves as earning reports were solid as well as housing and employment indicators out of the US.

Next week has two major trends: Central banks and PMIs. The Reserve Bank of Australia releases its minutes on Tuesday. The Bank of England will also release the minutes from its rate setting meeting two weeks ago on Wednesday . Given that the BOE’s chief economist has cooled expectations of a rate hike this year there will be little surprise in the minutes. The Bank of Canada will announce its benchmark rate. No change is expected given the mixed economic data and employment data confusion.

The flash manufacturing purchasing manager’s index PMI is a survey of manager to gauge their optimism regarding business conditions going forward. HSBC for China and Markit for the rest of the world are the firms that have compiled the early draft of the data and will release it starting with China and the schedule will move around the world given insights into the state of the global economy.

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