EUR/USD: Trading the Euro-Zone Gross Domestic Product Report

The advanced GDP reading for the Euro-Zone showed the economy contracted 1.5% in the fourth quarter to mark the biggest downturn since the series began in 1995, while the annual rate of growth slipped 1.2% from the previous year, which is the first full-year drop on record, and conditions are likely to get worse as the International Monetary Fund forecasts economic activity to contract 2.0% in 2009. As the region faces its first recession in over a decade, fears of a deepening downturn may lead policymakers to take further steps to shore up the economy, and the European Central Bank is expected to lower the benchmark interest rate by another 50bp to a record-low of 1.50% as the outlook for growth and inflation falter. Meanwhile, as the overnight rate falls close to zero, the Governing Council may look beyond the interest rate to manage monetary policy, and is likely to adopt unconventional measures to stimulate the economy.

The Euro-Zone slipped into its first recession in 15-years as the advanced GDP reading for the third quarter showed that economy contracted another 0.2% from the previous quarter, which lowered the annual rate of growth to 0.7% from 1.4%. Mounting growth fears paired with the fall in global commodity prices led the European Central Bank to lower the benchmark interest rate by 100bp over the last two-months to 3.25% after hold rates at a seven-year high of 4.25% throughout the third quarter, and the central bank is likely to ease policy further over the coming months as price pressures alleviate. Nevertheless, as global trade conditions falter, economic activity throughout the region is likely to weaken further, and may lead policy makers to step up their efforts in the coming months in order to steer the economy out of a recession.