ECB On Hold Once More?
by Angelo Airaghi [Guest Analyst]
8/3/2009
The ECB meets this week in Frankfurt (Germany). Rates should stay on hold once more, as the recovery process is just beginning in Europe. The U.S. dollar, in the mean time, is still at key support levels against major currencies.
The process might be slow and the recovery could not take the form of the classical V shape. However, the worst should be over for U.S. economy, after more than one year of losses. Leading indicators increased last month for the third consecutive time, while some corporate earnings have risen above expectations. In addition, manufacturing industries have reduced inventories and orders have improved, despite the sector remaining very volatile. In June, durable goods new orders slumped 2.5% after having increased 1.3% in May and 1.4% in April. Nevertheless, excluding transportation, orders would have jumped 1.1%. The real estate market has found a bottom at current levels and the increase of sales could boost consumer confidence. New home sales moved up 11% in June to 384,000 units. The up move was well distributed among all the U.S. regions with the exception of the South where sells declined 5.3%. Inventories are now at 8.8 months of supply from 10.2 months, while building permits, a forecasting indicator, rose almost 9.0%.
Finally, for the first time in many months, the number of people asking for unemployment benefits insurance declined to April’s level. Nonetheless, consumers remain prudent as the unemployment rate is still at the top. So, for the second straight month, the U.S. Conference Board’s Index fell more than expected to 46.6 in July, although it remained above February’s low of 25.3. Employment will remain weak for the near future as well, but the picture should brighten up over the medium term. In fact, the auto industry is expected to increase production, as exports are on the rise, since China and other important buyers are ahead in the recovery process. Additionally, the Federal Reserve should keep rates accommodative for most part of 2010 and eventually move them up again to balance a possible increase in inflation.
EUROPE: companies still cutting jobs.
Europe is lagging behind the economic recovery and some tangible results might start to be seen in the last part of the year. European companies are still cutting jobs and only the massive use of part-time work is moderating the downturn for now. In June, the unemployment rate increased to 9.4% (the highest of the past 10 years) in the Euro zone from 9.3% the previous month. Spain was once more among those countries to show the highest rate, while Holland had the lowest. In Germany, the economy fell 3.8% in the first quarter of this year, the worst result in more than three decades. The slowdown is expected to moderate in the second part of 2009, but uncertainty should persist for the medium term as well.
In July, the people out of work in Germany increased 30,000 to 3.46 million on an adjusted basis, while the unemployment rate remained unchanged at 8.30%. Nevertheless, the economic sentiment for the Euro zone rose for the fourth consecutive month to 76 from 73.2 in June, despite remaining below the historical average. In August, the German consumer confidence increased to 3.5 points from 3.0 points in July, as the buying propensity index rose to 25.1 from 14.7. The economic outlook remained at the contrary in the negative territory at -14 from -22.6. Nonetheless, the European Central Bank (ECB) is expected to keep rates steady, although inflation is at the lowest level. In July, the Consumer Price Index declined 0.6% year-on-year in the Euro zone.
Can$ meets key support
EUR/USD: The Euro is still trapped between 1.44 and 1.38. The resistance is at the conjunction of various long term lines and must be overcome with decision for higher prices. A move 1.4450 would target 1.46, eventually 1.52 A breakout failure would take the price back to 1.38.
GBP/USD: The market is still consolidating. A move above 1.6995 would take the price to 1.7390, 1.74. A breakout failure would instead target 1.64, 1.61.
USD/JPY: The dollar is meeting a strong resistance at these levels. They correspond to the 50 days MA and the two months trend line. A move above 96.40 is necessary for 96.80/97.10. A breakout failure could take the price back again to 93.00.
USD/CAD: The Canadian $ reached both the lower Bollinger band and the support of the past two years. A move below 1.0660 is necessary for 1.06/1.0350 A breakout failure would take the price back to 1.10, 1.13.
Finally, for the first time in many months, the number of people asking for unemployment benefits insurance declined to April’s level. Nonetheless, consumers remain prudent as the unemployment rate is still at the top. So, for the second straight month, the U.S. Conference Board’s Index fell more than expected to 46.6 in July, although it remained above February’s low of 25.3. Employment will remain weak for the near future as well, but the picture should brighten up over the medium term. In fact, the auto industry is expected to increase production, as exports are on the rise, since China and other important buyers are ahead in the recovery process. Additionally, the Federal Reserve should keep rates accommodative for most part of 2010 and eventually move them up again to balance a possible increase in inflation.
EUROPE: companies still cutting jobs.
Europe is lagging behind the economic recovery and some tangible results might start to be seen in the last part of the year. European companies are still cutting jobs and only the massive use of part-time work is moderating the downturn for now. In June, the unemployment rate increased to 9.4% (the highest of the past 10 years) in the Euro zone from 9.3% the previous month. Spain was once more among those countries to show the highest rate, while Holland had the lowest. In Germany, the economy fell 3.8% in the first quarter of this year, the worst result in more than three decades. The slowdown is expected to moderate in the second part of 2009, but uncertainty should persist for the medium term as well.
In July, the people out of work in Germany increased 30,000 to 3.46 million on an adjusted basis, while the unemployment rate remained unchanged at 8.30%. Nevertheless, the economic sentiment for the Euro zone rose for the fourth consecutive month to 76 from 73.2 in June, despite remaining below the historical average. In August, the German consumer confidence increased to 3.5 points from 3.0 points in July, as the buying propensity index rose to 25.1 from 14.7. The economic outlook remained at the contrary in the negative territory at -14 from -22.6. Nonetheless, the European Central Bank (ECB) is expected to keep rates steady, although inflation is at the lowest level. In July, the Consumer Price Index declined 0.6% year-on-year in the Euro zone.
Can$ meets key support
EUR/USD: The Euro is still trapped between 1.44 and 1.38. The resistance is at the conjunction of various long term lines and must be overcome with decision for higher prices. A move 1.4450 would target 1.46, eventually 1.52 A breakout failure would take the price back to 1.38.
GBP/USD: The market is still consolidating. A move above 1.6995 would take the price to 1.7390, 1.74. A breakout failure would instead target 1.64, 1.61.
USD/JPY: The dollar is meeting a strong resistance at these levels. They correspond to the 50 days MA and the two months trend line. A move above 96.40 is necessary for 96.80/97.10. A breakout failure could take the price back again to 93.00.
USD/CAD: The Canadian $ reached both the lower Bollinger band and the support of the past two years. A move below 1.0660 is necessary for 1.06/1.0350 A breakout failure would take the price back to 1.10, 1.13.
Angelo Airaghi is a Commodity Trading Advisor, registered with the National Futures Association and the Commodity Futures Trading Commission. He has been an active professional since 1990 working for major international financial companies. In the past 10 years, Angelo Airaghi has been an analyst and commentator for national and international media.
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