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Euro Falls as German, French Economies Shrink More Than Forecast

Euro Falls as German, French Economies Shrink More Than Forecast

The euro weakened after reports showed Europe’s two largest economies contracted in the fourth quarter more than analysts forecast, damping demand for the 17- member currency. Germany – the eurozone’s largest economy – saw its gross domestic product (GDP) shrink by 0.6% as exports declined. That was the deepest contraction since the first three months of 2009 – the height of the financial crisis. The French economy shrank by 0.3% in the fourth quarter. Both numbers were worse than forecast.

In other news, the European Union and the US will begin formal talks on a free-trade agreement, paving the way for the biggest trade deal in history. A deal would bring down trading barriers between the two biggest economies in the world. EU-US trade is worth around 455bn euros (£393bn; $613bn) a year.

On the FX markets, GBP underperformed its peers on Wednesday as market participants digested comments from BoE’s King who said the BoE will look through CPI to support recovery. King also added that while the BoE is ready to provide more stimulus, there are limits to what monetary policy can do and that more targeted measures must complement monetary policy. GBP also came under pressure in reaction to comments from the governor who said that investors view GBP depreciation as more likely than appreciation. The Q&A by King following the release of the Quarterly Inflation Report indicated that the central bank is becoming more flexible on inflation targeting and in turn puts emphasis on growth. In turn, this implies that the central bank will not hesitate to ease further, although it remains to be seen whether more Gilt purchases will be carried out or a more creative program will be introduced. In terms of technical levels, supports are seen at 1.5490/58 and then at 1.5414. On the other hand, resistance levels are seen at 1.5700, the 10DMA line at 1.5712 and then at 1.5810.

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