European services sector retract in July, while monetary policies remain unchanged

Forex Special

The hectic week finally came to an end where it witnessed the release of both the ECB and BoE interest rate decisions that were preserved at their current low records of 1.00 percent and 0.50 percent respectively, while no changes has been made to their monetary policies at a time the pound and the euro continue on ascending against the dollar, reaching nearly two-months high.

Euro-Zone

The economic week commenced with industrial data that assured the sector continued expanding in July, supported by the improvement in demand on a global scale, especially after the euro slumped against majors, providing a competitive edge to European goods among American and Asian products.

The service sector’s continued its contribution to growth in the euro-zone though at a slight progress as the flash estimate was revised lower to come marginally inline with the previous month, affected by sovereign debt chaos that overshadowed Europe’s economies and caused all sectors to retreat.

Europe’s debt problems forced many countries to reduce spending and overhaul the huge budget deficit, along with raising taxes and lowering public workers wages in order to ease concerns about another crisis and default.

Following the slowdown in economic conditions in the services sector; the possibility of another contraction aroused, where the sector’s contribution to growth totals nearly 70 percent. The worst case scenario is to witness a drop in second quarter final reading from the preliminary reading that reported a growth of 0.2 percent. Fears still dominate markets especially over the outlook of recovery in the US and Asian countries.

The ECB decided Thursday to leave its base interest rate at 1.0 percent for the 16th consecutive month, in order to support growth and push the economy to exit the sovereign debt problems. During Trichet press conference yesterday, ECB chairman stated that the current interest rates are “appropriate” while hinting that rates will remain at their record low for some time.

As for financial conditions, Trichet noted that third-quarter fundamentals will be stronger than the ones witnessed in the second-quarter of this year, as the pace of improvement persist in the economy despite the uncertainty that wrap the upcoming period.

Companies continued on supporting growth where major corporations released better than expected results during the past period, which restored confidence among investors and pushed equity markets to rally over the past two-weeks.

For the second consecutive week, European economies continue on releasing optimistic data, while at the same time other major economies from around the world that is highly correlated with Europe witnessed easing conditions and lower growth pace, where the US economy growth was subject to a downside revision along with China, raising doubts that economic recovery might falter.

The euro appreciated against the dollar over the past two months by 10.0 percent, after initial reports suggested that Asian Central Banks are following the footsteps of China’s Central Bank in diversifying the dollar reserves.

United Kingdom

Industrial sector conditions eased over the past period, but still above 50.0 which is considered the divine line between contraction and surplus in the sector, accordingly, supporting growth in the UK, noting that the sector contributes in nearly 18.0 percent of GDP in the country.

Industrial sector in the EU is also witnessing improving conditions where recent fundamentals from the sector showed that industrial new orders rose in the past month, while exports remained unchanged.

UK construction that contributes nearly 6.0 percent in the GDP, witnessed a slowdown in conditions over the month of July due to tight credit conditions and bank’s raising borrowing and lending requirements to investors and consumers as well.

The services sector also witnessed a retreat in conditions, where activities dropped to the lowest levels in nearly 13 years, as it returned to levels near 50.0, which is also considered a dividing point between contraction and expansion in the sector.

Industrial, services and manufacturing sector easing conditions was affected by sovereign debt problems, in addition to the government’s new emergency package of slashing budget deficit and trimming off spending in the country, not forgetting tax hikes and other measures to control and limit the impact of the huge budget deficit on economic recovery.

UK expanded by 1.1% in the second quarter according to the preliminary estimate, but easing conditions might force a downgrade to these figures in the final second quarter growth reading. The BoE left interest rates at 0.50 percent, the lowest since the establishment of the bank, aiming to support growth in the country and overtake the challenges that lay ahead of the recovery.