forex

London Session
Published: May 15, 2009 6:56 AM

Attention in European was dominated by a wave of poor Q1 GDP releases. German, French, Italian and then Eurozone data provided a depressing picture of activity in the first months of the year. Downward revisions to most of the Q4 data made the picture worse. German GDP plummeted by -3.8% q/q in Q1, -6.75 y/y. Data of this order makes the German government's prediction of a -6% contraction in 2009 GDP look like a moderate forecast. The news serves as a reminder of the severity of the current recession and although April data are beginning to suggest that the contraction in Q2 could prove to be far more benign, this news puts the risk of further policy easing by the ECB firmly in prospect.

Unsurprising the EUR suffered on this morning's data. Having held close to the EUR/USD1.3640 level in Asian hours, EUR/USD was hit hard on the early release of the German data and further declines followed. Some buyers have appeared at the 1.3540 level and EUR/USD is holding above its 200 day moving average suggesting there is still solid support. However, the market is likely to need strong confirmation of an improvement in Q2 data before re-visiting last week's EUR/USD positive 'risk trade'.

In tune with the increase in risk aversion, USD/JPY has been probing below the 95.00 key support level this morning. A close below this level would signal a move back to 90.00. Better news overnight in the form of a smaller than expected -1.3% m/m fall in Japanese Mar machine orders was overwhelmed by the weakness of European data this morning.

Cable has retreated from its earlier better levels, edging back towards the USD/GBP 1.5150 area. Sterling is still licking its wounds from the dovish BoE Inflation Report released earlier in the week and the accompanying rise in expectations that rates will remain at 0.5% for many months to come. While cable is still in an uptrend, momentum does appear to be waning.

This afternoon, US CPI and industrial production are among the data releases. Industrial production is expected to fall by -0.6% m/m in April. Significantly better data this afternoon will be needed to lift the tone of EUR/USD.