EURO Drops Despite Good News

If you ever wondered about the power of a single person’s comment on a currency market, wonder no more. Despite the European Central Bank’s (ECB) prediction of a smaller shrinkage for the euro zone economy this year than previously anticipated, the ECB’s president’s remarks after the release of the latest positive figures caused the euro to drop to a six-week low against the US dollar, according to NordFX Company.

The ECB had previously thought that the euro zone economy would shrink 0.6% in 2013, but now says it will only contract 0.4%. That news did not cheer ECB President Mario Draghias much as many had hoped. “I am very, very cautious about the recovery,” he said in recent remarks. “I can’t share enthusiasm. It is just the beginning. Let’s see, these shoots are still very, very green.” 

That decided lack of enthusiasm immediately spooked traders, who caused the euro to plummet in value. Why does this happen? Because traders often believe that people like Draghi have access to other information that has not been made public yet and a more comprehensive view of the exact state of a given economy, hence the gloomy words, according to NordFX Company.

In another reaction to the news that reflected a lack of enthusiasm, the ECB held interest rates at 0.5%, despite the signs that the euro zone is indeed recovering. Draghi said in July that interest rates will probably remain low for an “extended period.” How long that period will be is anyone’s guess; it will depend on the performance of European economies over the next few months.

A growth rate of 0.3% between April and June caused the ECB to revise its earlier forecast of 0.6% contraction. Germany and France led the way, with 0.7% and 0.5% growth during the second quarter, which was stronger than expected. Spain, Italy and the Netherlands, however, all saw output fall during the same time period.

The ECB, despite its president’s lack of infectious joy, still believes that the euro zone recovery will continue throughout 2013 at a gradual pace. Most analysts think that recovery will continue, and strengthen, in 2014, according to NordFX Company.