Euro-Region to Shrink 4%

May 4 (Bloomberg) -- The European Commission cut its forecast for the euro-area economy to show a contraction twice as deep as it projected just three months ago, and said the region’s deficit will swell to more than double the European Union limit.

The economy of the 16 countries sharing the euro will shrink 4 percent in 2009 and 0.1 percent in 2010, the Brussels- based commission, the European Union’s ****utive, said today, revising a January estimate for a contraction of 1.9 percent this year. The region’s average budget deficit will swell to 6.5 percent of output next year, when unemployment will rise to 11.5 percent, the commission said.

Companies across the continent are cutting production and firing workers to survive the worst recession since World War II, while governments’ efforts to support their banks and economies have pushed public deficits beyond the limits set out in European rules. The European Central Bank may this week announce new measures to tackle the recession after cutting its benchmark rate to a record low.

“The European economy is in the midst of its deepest and most widespread recession in the post-war era,” EU Monetary Affairs Commissioner Joaquin Almunia said in a statement. “But the ambitious measures taken by governments and central banks in these exceptional circumstances are expected to put a floor under the fall in economic activity this year and enable a recovery next year.”

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This is definitely not a positive sign for the Euro economy.

The Euro gained early in Tuesdays session only to give it back later on as the US markets opened and investors began taking profits and returned to the safe haven Dollar in advance of Thursday’s US stress test release and the European Central Bank’s decision on interest rates and stimulus. The past few sessions saw the Euro benefit from the positive sentiment on the street as traders took advantage of good economic news to come out from hiding behind the stalwart Dollar and Yen. However, as Thursday’s ECB meeting comes close, investors who traded the Euro in recent days are cashing in and taking cover once more. We, forex online traders can expect to see strength in the Euro should there be signs that the ECB will not adopt and aggressive policy – a topic that has been widely debated in recent weeks and seemingly dominated the market news.

At 11:00PM GMT, the Euro was trading down .4% to the Yen to 131.88, down 1.1% to the Sterling to .8831, down .4% to the Canadian Dollar to 1.567, down 1.2% to the Australian Dollar to 1.7926 and flat to the Swiss Franc after an up and down session to 1.5102.