Euro Under Fire After PBOC Rate Hike & Poor GDP Data

The euro is under pressure on Friday after some downbeat GDP reports from the euro zone, coupled with a hike in the People’s Bank of China’s reserve ratio this morning.

German preliminary Q4 GDP came in flat on the quarter despite calls for a 0.2% pickup and prior 0.7% gain, while annual growth was down 2.4%, faster than forecasts for a 2.2% slide, but slower than Q3’s 4.8% contraction.

On the flip side, French Q4 preliminary GDP rose 0.6% quarter-over-quarter in Q4, faster than forecasts for a 0.5% pickup and the previous revised 0.2% gain, but annual growth was down 0.3%, in line with expectations and slower than Q3’s 2.3% slide.

Finally, euro zone preliminary Q4 GDP rose 0.1% quarter-over-quarter, slower than calls for a 0.3% pickup and prior 0.4% gain, and annual growth was down 2.1%, faster than expectations for a 1.9% decline and prior 4.0% pullback.

Adding to the downside for the European currency was an unexpected hike in the Chinese reserve ratio. Effective February 25, the minimum reserve requirement will be 50 basis points higher at 16.5% for large banks and 14.5% for smaller financial institutions.

The news came as a shock to the markets which saw a smaller than expected CPI gain earlier this week.

According to the local Xinhua news agency on Friday, the PBOC says the move is not a shift in monetary policy pledging to continue maintaining its moderately loose monetary policy.

The report also says that today hike in the reserve requirement is geared at absorbing some of the excess liquidity in the country’s financial system.

In the immediate aftermath of the announcement form the PBOC, EUR/USD plunged 48 pips to 1.3567. The pair last traded lower by 98 pips at 1.3595 after trading in a range of 1.3532 to 1.3695.

Support lies at 1.3631 followed by 1.3421. Resistance comes in at 1.3698 followed by 1.3802.