Forex Market Review – Euro weakens ahead of ECB meeting

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EURUSD extended losses into the New York trading session to reach a new 16-month low of 1.2661. The single currency began its fall against the dollar earlier in the day on weak data from Germany, showing Europe’s largest economy contracted by 0.25 percent, ending a two year growth streak, giving signs of heading into a recession.A further blow to the euro came after the head of sovereign ratings for Fitch Ratings said the European Central Bank should step up purchases of troubled government bonds in order to save Italy and prevent a “cataclysmic” euro collapse.

The euro showed little reaction to reports that German Chancellor Angela Merkel indicated Germany may be willing to provide more money for the European Stability Mechanism, the euro zone’s permanent rescue fund, when it will be launched later in the year.

The focus turns to the ECB policy meeting on Thursday. Rates are expected to stay at 1.0 percent this time but there is growing speculation that an interest rate cut could come in the near future and this would weigh on the euro. Attention will also be on a Spanish bond auction which takes place before the ECB meeting.

The British pound was another big loser today, falling against most major counterparts, including against the dollar, euro, yen and aussie. Sterling was hurt by data which showed that the United Kingdom’s trade deficit rose more than expected, while shop-price inflation slowed to its lowest rate in sixteen months. This gives evidence the British economy is stagflating, which reinforces speculation that the Bank of England may be pressured to inject more stimulus, dragging down the pound. GBPUSD tumbled to a low of 1.5308 from a day high of 1.5486 while GBPJPY fell to 117.69. EURGBP moved off a 16-month low of 0.8220 reached on Monday to rise to 0.8292.

The US dollar gained more ground across the board. The ICE dollar index, which measures the greenback against a basket of six major currencies, rose to 81.313, up from 80.864 Tuesday. Also helping the dollar, economic data in the U.S. have been coming in stronger. Today, the Federal Reserve’s Beige Book noted modest to moderate economic growth and limited price pressures. The Beige Book is a compilation of economic reports from the Fed’s regional banks.