European Economy Slows Down More Than Expected - 17.8.2011

US Dollar Stock markets worldwide were mostly lower on Tuesday as investors were disappointed with the results of the Germany-France meeting in Europe and after some unfavorable reports were issued in the euro zone and in the USA. The US residential real estate market is still struggling, figures from the Commerce Department showed yesterday. Housing starts fell by 1.5% to 604000 units in annual figures from 613000 in June, that was less than previously estimated. Building permits, an indicator of future construction, also dropped by 3.2% in July. Industrial production however unexpectedly exceeded estimations, rising by 0.9% in July after a 0.4% increase in June. Producer prices data will be released today. According to estimations, the core index’s annual pace, which excludes volatile food and energy, decreased in July to 2.3% from 2.4%. In conditions of slowing economic growth, Saint Louis Federal Reserve Bank President, Bullard, said the central bank isn’t signaling a third stimulus program with its commitment to keep rates near zero through the middle of 2013. “The most likely outcome for the US is still that the economy continues to grow at a moderate pace through the second half of the year,” Bullard said late yesterday in an interview, according to Bloomberg. “If the economy is substantially weaker than expected, we could take more action, especially if it was coupled with a renewed deflation risk.” The dollar strengthened somewhat yesterday against its major peers, except the Japanese yen and the British pound, while Asian trading session today was quite enough for the greenback. Euro The euro weakened yesterday against the US dollar as German Chancellor Merkel and French President Sarkozy rejected an expansion of the 440 billion-euro rescue fund and rebuffed calls for joint euro borrowing to end the debt crisis, saying greater economic integration was needed first. They proposed that euro zone leaders gather more often to better coordinate budget and tax policies across the currency bloc. “It’s very obvious that in order for this to work we need a stronger convergence in finance and economic policy within the euro zone, and Germany and France are at the vanguard of that effort,” Merkel told reporters. “We could imagine having euro bonds one day, but at the end of a European integration process, not at the beginning of an integration process,” Sarkozy said. The single currency failed to gain ground after weaker than expected GDP growth figures released yesterday. Europe’s unexpectedly sharp economic slowdown has increased the risk of another recession and may prevent the ECB from raising interest rates again this year. The euro zone GDP annual growth rate decreased to 1.7% from 2.5%, after the economy expanded by only 0.2% in the second quarter, showing the worst performance since 2009. Pair EUR/USD fell yesterday from 1.4471 to below 1.4400. British Pound The pound rose against all its major counterparts after the UK Office for National Statistics reported yesterday consumer prices annual growth rate accelerated to 4.4% in July, from 4.2%, while economists predicted a 4.3% increase. The core measure, which excludes some volatile items, rose as well to 3.1% from 3%. That reduced the likelihood the central bank will inject further monetary stimulus into the economy. Pair GBP/USD rocketed yesterday in a four-day surge to 1.6476, the highest since June 2011.