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European GDP numbers were released today. Germany led the Euro-zone growth with a whopping 2.2%, and also the overall number was excellent – 1%, much better than expected. But the gains in EUR/USD are very limited. Why? Here are three answers.

Apart from German growth, 0.9% more than expected, best since the reunification, France also exceeded expectations, and the weak economies of Spain and Romania also showed positive growth rates. The initial figures for Q2 were definitely great, no matter how you look at them. But EUR/USD is still trading at around 1.2860. It climbed to 1.2915 but went back down to the same levels as before the release. Let’s see why:

  1. Austerity measures to slow growth: In Q2, many governments in Europe adopted severed budget cuts. The impact of these cuts is still to be seen, and it’s expected to damage growth. The Greek economy shows us how austerity measures slow the economy.
  2. Europe enjoying weak Euro: The common currency fell from a peak of 1.5144 in December 2009 to 1.1876 in June 2010. The weak Euro, also in its crosses against other currencies, helped European exports, especially export-oriented Germany. A weaker Euro is in the interest of European governments. While intervention is unlikely, any rise in the currency will hurt the economies, and will be followed by a drop of the currency.
  3. Gloomy market mood: The statement from the Federal Reserve, that was analyzed as a great concern from a double dip recession in the US, is worrying for Europe. The US is usually the economic locomotive of the world. A new recession in the US means trouble elsewhere. And when there’s trouble all over – the US dollar benefits. So does the yen.

In recent days, we’ve seen how risk aversion plays a big role in trading – bad US figures mean a stronger dollar. If  genuinely excellent numbers from Europe fail to lift the Euro, it seems that the Euro was rising only to resume falling.

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