Foreign exchange markets see-sawed on Monday following Friday’s terrorist attacks in Paris and as Japan’s economy fell into technical recession with two consecutive quarters of contraction.
The euro was holding on to 1.0750 after briefly dipping below 1.07 following the market’s open, while dollar / yen had been pushed down to 122.24 on risk aversion before rebounding to 122.74. Euro / pound was also off to 0.7025 before also climbing back to 0.7075.
Regarding the Paris terrorist attacks the opinions of analysts point to a short-term hit to economic growth but the long-term impact should be small. Given the miss in third quarter Eurozone GDP on Friday as well as the terrorist attacks, the case for more stimulus from the ECB has been made stronger, which should weigh on the euro.
In other economic news, Japan’s GDP for the third quarter slightly missed expectations by coming in at -0.2% instead of -0.1% expected by economists. Although on the headline level the miss is not significant, capital expenditure was much worse than expected at -1.3% q/q compared to -0.4% the analysts had predicted. Private consumption compensated somewhat by coming in at 0.5% compared to 0.4% consensus estimate. Taken together with the second quarter’s -0.2% (upwardly revised) contraction, Japan meets the technical definition of recession right now; that is two consecutive contracting quarters. However, as the economy is expected to rebound in the fourth quarter, the technical recession is not something that will alarm policymakers. Therefore, it is unclear whether the data will push the Bank of Japan towards more stimulus in the near-term.
Looking ahead, the two main events today will both concern the Eurozone as they are the region’s final inflation numbers for October as well as a speech by Mario Draghi a few minutes later. Eurozone inflation should be at zero year-on-year, while core inflation is expected at 1%. There will be no major US data out and market participants will be focused on UK and US inflation to be announced tomorrow and expected to move the market.
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