The Euro saw choppy trading throughout the overnight sessions after bouncing from support at 1.4850. Despite the European GDP report confirming market expectations that the economy contracted 0.2% in the second quarter from a 0.7% increase the quarter prior, the pair managed to remain above the 1.4900 price level. It was the first decline in growth since the institution of the single currency, led by declines in the regions three biggest economies.

- Japanese Yen: Service Industry Fell Most In Four Months
- Euro: Growth Contracted In 2Q
- British Pound: Consolidating around 1.8700
- US Dollar: Consumer Prices on tap

The Euro saw choppy trading throughout the overnight sessions after bouncing from support at 1.4850. Despite, the European GDP report confirming market expectations that the economy contracted 0.2% in the second quarter from a 0.7% increase the quarter prior, the pair managed to remain above the 1.4900 price level. It was the first decline in growth since the institution of the single currency, led by declines in the regions three biggest economies. Indeed, Germany, France and Italy saw growth fall 0.5%, 0.3% and 0.3% respectively. Meanwhile, inflation declined 0.2% in July and remained flat at 4.0% on an annualized basis as energy costs slowed from 2.7% to 2.6%. The core reading declined as most components were level and communication costs continued its downward trend, falling 2.2%.

The European economy may be headed for a hard landing as the ECB continues its focus on price stability. The central bank’s quarter point increase in July has accelerated the decline in growth as manufacturers now most contend with higher credit costs in addition to rising raw material prices and slowing demand. Indeed, France saw its non-farm payrolls fall for the first time since 2004 adding to the troubles that the German labor market has been experiencing. This month’s German labor report will be critical after last month saw a reduction of 20,000 jobs. If employment conditions continue to worsen, it may force the central bank’s hand and lead to a rate reduction sooner than expected. President Trichet’s concerns of secondary effects of inflation may be unwarranted as French wages slowed to 0.9% from 1.1% in the first quarter, and with headline inflation remaining flat there may be few obstacles left to prevent future easing.

Consumer prices in the U.S. are expected to have risen to 5.2% in July as record level fuel and food costs filter through to other sectors. Inflation has become a concern for the Fed as Americans continue to see their purchasing power erode, which had led to speculation that the central bank could increase rates as soon as their next policy meeting. Yet voting members Richard Fisher- who dissented to keep rates unchanged last meeting- and Gary Stern, recently delivered dour outlooks for the U.S. economy. Traders have significantly reduce their expectations of an increase in interest rates, as Fed fund futures odds of a quarter point hike at the September meeting have fallen to 16% from 54% a month ago. However, a significant increase in consumer prices combined with oil rising back above $117 per gallon on the back of a bigger than expected drop in U.S. gasoline and crude supplies, could lead to dollar strength as interest rate expectations increase.

David Rodriguez is a Currency Analyst at FXCM.