One Financial World

Down and out, or about to bounce back? Europe is in recession, but is this set to send the euro plummeting?

The nations of Europe make for a pretty sad sack of potatoes right now. Just this morning GDP figures revealed that Germany (the European powerhouse no less!) contracted –0.2% in the last three months of 2011. In addition, it seems a sure thing that other countries (notably indebted hombres like Spain and France) shrank even more in this period. So in short, if I were a betting man, I’d put a pretty large stake on the idea that Europe is in recession right now.

Of course, turning to foreign exchange, the question is then: is this set to cut the euro down to size against sterling?

Hear No Evil See No Evil In Foreign Exchange

The odd thing is that so far, the fact that Europe is an engine in reverse has left barely a dent on the euro. Since last December, the euro has gained two cents against the pound and about the same against the US dollar. This is in spite of the fact that Europe as a whole remains up a creek without a paddle (perhaps more so than two months ago!) So what gives?

It reflects a number of things.

For one, when it comes to Europe, the markets come across oddly charitable. The least bit of good news out of Greece or France is enough to give the euro wings (though chances are this kind sentiment will only last a few hours.) It certainly is not the case for sterling, but when it comes to the euro investors are like favourably-disposed parents: they might recognise that their kid has done wrong, but they’re all too eager to forgive.

The ECB Foreign Exchange Bonanza

The second reason the euro is standing its ground is because of the European Central Bank.

In the last two months, the ECB (and in particular its president Mario Draghi) has pulled out all the stops to prevent the crisis in Europe boiling over. He initiated the LTRO (Long Time Refinancing Operation) more or less giving unlimited hand outs to the banks of Europe at barely-there interest rates. This literally flooded Europe with almost €500bn in new cash – making the financial crisis seem a lot less immediate! This has been invaluable in propping up the euro.

Given these helping hands then, it seems a little thing like an international recession does not mean much to the euro! Looking ahead, it would take a sudden downturn in Europe for the currency to lose its gains.

This guest post was contributed by Michael Smith from Pure FX.

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Guest Post by Melissa

Is The EU Recession Set To Slap The Euro On The Foreign Exchange Market?

Getting on Your Feet Financially after Unemployment