Euro-Zone GDP, U.S. Retail Sales, and ECB 10th Anniversary

The euro-zone officially fell in its first recession after today's reports showed that the economy contracted 0.2 percent in the third quarter, following a 0.2 percent decline in the previous quarter.

The GDP numbers turned negative in Italy and Spain, and Germany. France escaped the official recession by an anemic 0.1 percent growth which the finance minister called it a surprise. Some analysts believe that the service sector in France is also subject to downturn and getting negative GDP numbers is just a matter of time.

Today was also the 10th anniversary of European Central Bank and there was a meeting in Frankfurt with Bernanke and Trichet and also central bankers from Israel, Mexico, and deputy governor of China's People Bank of China. Ahead of the Washington states summit which officially starts tomorrow, policy makers expressed their support to help financial institutions to overcome the credit crisis.

Reactions to the economic data were somewhat limited even to the record decline in the U.S. Advanced Retail Sales which fell 2.8 percent in October. Markets welcomed the central bankers' signals for continuing easing monetary policies with optimism to have at least some fiscal policy announcements from the Washington summit.

I made about 3 percent profit from selling eurjpy.

Stocks, Treasuries, and Yen; Toward Understanding the Big-Picture

Rising inflation is not always negative for stock markets especially when the prospect is improving and other asset classes look more risky.

Last week showed that the CPI increased in Europe and North America but the possibility of a dipper slowdown in global economy noticeably eased concerns about the future of inflation. It may explain why equity indexes climbed, yields on Treasuries fell, gold and oil prices dropped and even carry-trading somewhat resumed.

When Inflation doesn't Work!

The cost of living in Euro-zone and UK rose in June but the market reaction looks completely different to what you may remember from July. At that time, rising inflation headlines in addition to revived concerns on the health of the U.S. financial institutions, Freddie Mac and Fannie Mea specifically, helped both Euro and pound reaching their records highs against the dollar. However inflation my look not so frightening when everything pointing to the possibility of a sharp slowdown in global economic activity:

• IMF's World Economic Outlook Update in July pointed to an increasingly slowing economy in the UK, EU, and Japan.
• Gross Domestic Product shrunk in Euro-area in the second quarter, for the first time since introducing the Euro, after economy contracted in Germany and France, the two largest euro economies.
• Japan GDP also showed that the world second largest economy contracted at an annualized 2.4 percent in the second quarter when Japanese officials earlier warned about it.
• The data also showed negative numbers for Industrial Production in Japan, France, and Euro-area.
• Moreover, the war in Georgia just increased concerns about the security issues in European economies.

There were certainly reactions to this situation. Commodity prices lead by oil extended their declines. One month ago it was really difficult to imagine gold at 772 $/ounce but it happened on Aug 15.

The only winner was certainly the dollar which appreciated against all major currencies. The depreciation of sterling was the most in almost 37 years. Nevertheless, I think the appreciation of the greenback against the Yen was somewhat limited which may come from a widely reduction in carry-trading.

Finally, almost all economic data for the week were overshadowed, positively or negatively, by the big-picture which was the fear of a global economic slowdown. There was almost no significant reaction to the GDP or CPI in Euro-zone at the time of the releases showing that most of decisions had been already made.

No surprise, No money!

Euro zone CPI released and was even more concerning. Although I was true in anticipating its positive impact on Euro, but my loss margin was too tight to tolerate the earlier movements. It is very likely that the relatively large size of the position made me too conservative.

Sharp loss experienced

EURUSD hit the stop loss at 1.5360, making 50 pip loss, but the size of position was three times more than my average trades, so increased the magnitude significantly.

I don't know the actual reason behind the reverse in the market. It might be a comment from an EU official. It happened very fast; considering the time of the event which is about shifting between Asian and European sessions, I guess it might be result of different views in the market.

It is relatively reasonable to expect that the general risk would rise when we move through different sessions. So I could be blamed for underestimating this fact when I decided to increase the size of position that time, but not more.

Another fact might be that I didn't give the market adequate time to reflect any possible effect from the last weekend G-8 summit.

26 pip profit in less than 3 hours, When diversification works

I bought EURJPY at 166.80, because dollar had more support and I wanted to give the euro another chance. It worked! The position closed automatically after hitting Take Profit at 166.80, which was 7 pip below the first resistance.

It is more encouraging when I see my other position, EURUSD still struggling to go in profit. However, I still expect it to increase in the next 5 hours, when we get the Euro zone CPI report.

I can remind my last week post; it is why I see the experience so important.

Long on EURUSD

Betting on Euro zone CPI, I have bought EURUSD at 1.5410, targeting first resistance. I would increase the size if technical data improve.

Bullish on Euro

Euro-Zone CPI is ahead and I expect Euro to outperform other currencies, and I see the dollar and the yen as possible candidate for selling in favor of Euro. The reasons:

• CPI is more interesting when the ECB expressed concerns on inflation and clearly said it is going to raise interest rate as soon as the next meeting.


• Lehman Brothers is to report the quarterly results tomorrow which is likely to revive concerns on credit strains and the need holding interest rate low.


• I expect that any positive effect from the last week G-8 summit start to fade as we enter the new week.