The euro rebounded against the US dollar following Friday's data, which shows that three of the four largest economies in the eurozone finished last year slightly better than economists' forecast. This suggests that the eurozone may avoid a deeper recession than expected, but at the same time, it continues to face difficulties in the fight against coronavirus. Due to this, quarantine restrictions and lockdown have to be extended.
Friday's reports indicate that Spain's GDP unexpectedly rose 0.4%, while economists had expected it to fall 1.4% late last year. A surprise was also the data, where the growth of German GDP was also recorded, which we will discuss in more detail in the latter part of this article.
However, even though many companies and businesses are adjusting to work even in a pandemic, and have managed to find a way to cope with the restrictions, the growth prospects of the European economy remain rather bleak, and it is unlikely that the eurozone's GDP will be able to avoid a recession in the 4th quarter of 2020. The spread of new strains of coronavirus and slower vaccinations in the EU increases the risk of longer restrictions, which will require new support measures and economic stimulus. This is not good news for the euro.
Recently, the political elite of the EU has been criticized for an acute shortage of supplies from drug manufacturers, including AstraZeneca Plc. The EU executive said on Thursday that it would force companies that export the COVID-19 vaccine to other countries to obtain permission to do so. It has been repeatedly noted that the faster the vaccination takes place, the sooner it will be possible to remove quarantine restrictions and weaken social distancing measures, which, in turn, will revive the economy and allow it to return to its previous level of functioning.
During her recent meeting, the President of the European Central Bank, Christine Lagarde, promised to strengthen support if necessary. However, not everyone agrees with this approach. For example, a member of the ECB's governing council, Gabriel Makhlouf, said that he does not see the need to reduce interest rates. "Right now, such a decision would be highly unjustified," said Makhlouf in an interview on Friday. According to him, the whole focus will be shifted to March, when the next meeting of the European Central Bank will take place and when data will be available showing what the beginning of this year was for the European economy. By and large, he repeated almost everything that Lagarde talked about last week
Returning to the topic of German GDP. According to data from Destatis, Germany's economic growth slowed sharply at the end of 2020 due to restrictions the government was forced to resort to contain the spread of the virus. The gross domestic product grew by only 0.1% in the fourth quarter of last year, after growing 8.5% in the third quarter. Economists had zero growth forecast. On an annualized basis, GDP declined 3.9% after falling 4% in the 3rd quarter. Total GDP for all of 2020 was 5 percent lower than in 2019. This is the largest contraction in the economy since the 2008-2009 financial crisis. The lockdown caused by the coronavirus pandemic has affected household consumption, but export growth has supported the economy.
As for the unemployment rate, there were some surprises here. The Destatis report noted that unemployment remained unchanged at 6.0% in January.
As for import prices, they continued to decline in December this year, which slightly complicates the task of reaching the inflation target. According to the data, import prices fell 3.4% year on year, following a 3.8% decline in November 2020. Economists had forecast a 3.1% drop. This sharp decline was directly related to energy imports. Energy prices fell 23.9%.
The French economy, on the other hand, shrank less in the 4th quarter of 2020, as the imposition of curfews and social distancing measures did less harm than during the first wave of coronavirus. According to Insee, gross domestic product contracted 1.3% after rising 18.5% in the third quarter of last year. At the same time, household spending increased in December due to the demand for manufactured goods. The report found that household spending in December rose 23% compared to November when consumption fell 18%.
A slight strengthening of the euro did not greatly affect the technical picture that we could observe in the first half of the day. Only a breakout of resistance 1.2135 will increase the demand for risky assets, which will return the trading instrument to the highs of 1.2180 and 1.2220. A break of the intermediate support at 1.2090 will lead to a larger sell-off of risky assets around the 1-year low of 1.2050 and will open a direct path to the 1.2020 area.
