With little major forex news breaking in the past few days, the euro continued trading flat against the US dollar and held steady at the $1.2400 level on August 7 trading. The only major economic news from the region came out of Italy, with its second quarter Gross Domestic Product (GDP) figures showing that the country remained in recession. According to preliminary estimates, GDP fell by 0.8% from the previous quarter and by 2.5% compared with the same quarter from last year. The decline marked the fourth quarter in a row that GDP fell.
The decline was attributed to the austerity measures that the administration of PM Mario Monti is implementing to deal with increasing borrowing costs. The package of measures was driven by concerns over the spreading Eurozone sovereign debt crisis, with forex news analysts concerned that Italy may follow EU countries such as Greece, Portugal and Spain by asking for a bailout from the Eurogroup. Apart from a €10.5 billion package, the Monti government recently unveiled an additional €4 billion in public spending cuts, including reductions in health care spending and a public sector headcount.
The new measures, which were announced on August 6, are expected to allow Monti to delay enacting an increase in the VAT until July 2013, from its original date of October 2012. The Italian PM had been attempting to persuade other European leaders to give the country some leeway on tight fiscal targets in order to give the country some breathing space to grow.
The announcement of the measures had caused volatile trading of the EUR/USD, which at one point during trading hit a high of $1.2444, the highest level it had achieved since July 5. However, the austerity measures failed to win the confidence of investors in the bond markets, who dumped Italian sovereign bonds, pushing their yields to near-unsustainable levels due to market concerns that the euro would break down.
In the short term, there are no forex news developments that are seen to increase the volatility of the markets since Europe is currently in the midst of its holiday season while the London Olympics is about to close. The only upcoming economic news releases are Italy’s balance of trade, Greek unemployment figures and the monthly European Central Bank bulletin.
Meanwhile, the markets are expected to remain quiet as the EZ has no scheduled major sovereign debt auctions while 10 year bond yields from Spain and Italy are expected to remain on check with Spanish yields at below 7% and Italy below six percent.
Italy remains the Eurozone country with the heaviest debt burden, accounting for 123% of GDP, which makes it vulnerable to sudden losses of market confidence, which would make it difficult, if not impossible, for the Italian government to roll over its debt when they become due.
Earlier forex news had shown that Italian business confidence fell in July due to pessimism over the country’s economic prospects. According to Confindustria, an employers’ lobby group, the economy is expected to shrink by 2.4% in 2012, with unemployment rates seen hovering at around eleven percent. Official government forecasts see the economy contracting by 1.2% for the year.