ECB to Hold Rates Steady on Thursday?

Economic numbers worsened in the United States, as the housing crisis is spreading into most of the economic sectors. With stocks struggling to find a bottom and crude challenging important resistance levels, consumer spending might deteriorate further in the near future. At least, until the aggressive measures taken by the Federal Reserve and the Administration will start to produce some tangible results. The European Central Bank (ECB), at the contrary, will probably leave rates unchanged at 4.00% for now, as growth is still supportive and inflation pushing higher.

Savings are increasing

In January, existing home sales declined 0.4% (-1.8% expected), as multiple homes slumped 6.5% and single homes rose 0.5%. We are probably experiencing one of the worst deflationary period in history for the housing market. Inventories are at a very high level and they increased 5.5% in January, taking the months of supply to 10.3 months versus December's 9.7 months. Consequently, home prices fell 2.9% month over month and are now down 4.6% year over year.

For the first time in many years, households are more focused on saving than spending, so to better confront the increasing commodity prices and the fast slowdown of the economy. In fact, after the fall of University of Michigan consumer sentiment index, which slumped to 70.8 in February from January's 78.4, the lowest level of the past sixteen years, the Conference Board consumer confidence index moved down to 75.0 (82 expected) in February compared to January 87.3. The worst result in almost five years was broad-based and covered present situation, expectations and business conditions.

The Federal Reserve to act aggressively

The slowdown of the economy is confirmed by the durable goods orders, which slid 5.3% in January (4% expected) from December's gain of 4.4%, as the non-defence aircraft and part orders moved down almost 31% month over month. Core orders, without the volatile transportation sector, declined 1.6%, while inventories increased 0.6% on the top on December's 1.1%. How about the future? Growth in 2007 has been 2.2% versus the 2.9% in 2006 and the downtrend is expected to continue in 2008 as well.

Inflation remains a constant threat, but will not change the Federal Reserve policy on rates. In January, the Producer Price Index (PPI) increased 1.0% after declining 0.3% in December's. Core prices, excluding food and energy, moved up 0.4% from December's 0.2%. On an annual basis, prices were up 7.4% in January (the largest increase in the past twenty-five years) versus December 6.3%. Another series of rate cuts is expected in the nearest future, so to help the economy to get back on truck in the shortest period of time. Rates, currently at 3.00%, could reach this year 2.00%.

European momentum still on, but for how long?

In Germany, business confidence stays strong, despite a slowing global growth. The European economy is still benefiting from the positive momentum of the past two years German businesses are satisfied with central bank interventions and consumers are watching events with an overall positive attitude toward to future. In effect, economic numbers are supportive for now. First, the IFO business climate index improved to 104.1 in February from January's 103.4 and the current conditions index rose to 110.3 from 107.90. Second, the GFK index held steady at 4.5 points in March.. Lastly, the unemployment rate fell to 8.0% in February from 8.1%, the lowest level of the past fifteen years.

So, everything is ok for Euroland? Not exactly everything. The propensity to buy have decreased among German consumers by falling to -15 from -8.8 points. In addition, for the first time in a year, consumer spending slid 0,8% in the fourth quarter of 2007 from the third quarter increase of 0.3%. The reason? The stellar euro and a global economic slowdown might begin to hit exports. In fact, they rose only 1.3% in the final part of 2007, compared to the previous 2.5%, while imports fell 0.2%, versus 3.2%.

ECB to hold rates steady again

In reality, the state of the economy changes among the various European nations. In Italy, as an example, business confidence touched the lowest level in more than two years and in France housing starts fell 7.1% year over year. However, the European Central Bank (ECB) should leave rates unchanged at 4.00% during the meeting of March 6th. With numbers still supportive, inflation remains a priority, although the Euro zone M3 monthly supply growth increased at a lower rate. In January, it moved up 11.5% (11.3% expected) year over year, below December's 11.6% and November's 12.4%. The three months average ending December 2007 eased as well to 11.8% from 12.1%. During the same month, German Consumer Price Index (CPI) increased to 2.8% year over year from 2.7% and below December's 3.2%. The trend is confirmed by the Euro zone annual inflation, which moved up to 3.2% in January from December's 3.1%.

Eur/Usd resuming uptrend

EUR/USD cleared the important resistance at 1.50/1.51. The short/medium/long term trends are all pointing upward, until the Euro will remain above 1.4880. The next target could be 1.53, eventually 1.55.

GBP/USD is consolidating between the support at 1.93/1.94 and the resistance at 1.98/1.99. the higher Bollinger band is again challenged. A close above 1.9980 could lift the British Pound to 2.0010/2.010. A decline below 1.9260 would instead let the British Pound to slip to 1.9210/1.9150.

USD/JPY moved below the important support area at 105.00/104.70, which is at the conjunction of various trendlines and the lower Bollinger bands. It could now target 103.80, eventually 103.0/102.50.

Angelo Airaghi
http://www.actionforex.com/fundamental-analysis/weekly-forex-fundamentals/ecb-to-hold-rates-steady-on-thursday?-2008030338007/