Weekly Forex Fundamentals

ECB Keeping Rates Steady?

Weekly Forex Fundamentals | Written by MG Financial Group | Apr 07 08 15:33 GMT |

ECB Keeping Rates Steady? Economic contraction is accelerating in the United States and is hitting deeply into consumer pocket. In effect, total consumer spending in real terms was almost unchanged in the past three months, but spending in luxury consumer goods is already retracing. The Federal Reserve should cut rates again soon, while the European Central Bank (ECB) might keep them unchanged at 4.00% for now. The job is not over for the Federal Reserve Debt is absorbing almost 15% of households disposable income and much work will be needed to take debt payments back into a more sustainable level. Wages are declining rapidly in the private sector and are now near 3% year over year, compared to the 7% of one year ago. The Federal Reserve should cut rates again in the near future, so to bring fed funds rate below 2.00% in the coming months. Especially, if the job market continues to deteriorate. The unemployment rate is now 5.1% from February's 4.8%. In March, payroll employment declined 80,000 units (-50,000 expected) on the top of February's fall of 76,000 and January's move of -76,000. The downtrend would likely to continue throughout this year, as construction and manufacturing, the most beaten lately, are likely to decline further in the near future. Employers appear to anticipate further weakening in the economy, a tiny or negative growth is expected this year, by letting workers go. In effect, the ISM manufacturing index increased to 48.6 (47.2 expected) in March from February's 48.3, but it remains below the important benchmark of 50.0. Production (48.7 from 50.7) and new orders (46.5 from 49.1) fell, while employment (49.2 from 46.0) increased. The slowdown in manufacturing is constant, but still away from the level of 41.0 reached during last recession. The service sector, at the contrary, has managed to increase to 49.6 (48.7 expected) from February's 49.3. Nonetheless, business activity is still growing and increased to 52.2 in March from February's 50.80 and January's 41.9. ECB holding rates steady once again The Euro is consolidating against the U.S. dollar, as European investors are realizing that the economic slowdown, after the U.S., could hit Europe as well. In fact, the announcement of heavy losses by two major banks like the Union Bank of Switzerland (UBS) and the Deutsche Bank, although partially known, has been like a weak up call for some. The financial turmoil is spreading all round the world and Europe is not immune to it. In March, Euro zone manufacturing Purchasing Managers' declined to 52.00 from 52.3 in February, still above the benchmark of 50, but it indicates that the short/medium term trend is on the downside. In February, retail sales fell 0.5% (+0.2% expected) compared to January's +0.5%. In Germany, economic news have been mixed lately. On one side, German retail sales and the final Purchasing Manager's Index services (PMI) slid. The first declined 1.6% in February from January's +0.9%. The second, fell to 51.8 in March from February's 52.2. On the other, German unemployment rate was better then expected and fell to 7.8% (7.9% expected), the lowest level of the past sixteen years. In reality, inflation is pushing higher and will make it very difficult for the European Central Bank (ECB) to cut rates in the nearest future. The Euro zone flash estimate Consumer Price Index (CPI) for March showed that inflation moved to 3.5% from 3.3%, while the M3 money supply was almost unchanged at 11.3% versus 11.5%, but much above the ECB benchmark of 4.5%. Nevertheless, during the second part of the year, inflation might decline slightly, as most commodites are receding from their highs. It should only be a correction within a strong uptrend, but it could give the ECB some room to cut rates if necessary. This Thursday, however, rates should remain steady at 4.00%, although the strong Euro and global economic slowdown is beginning the undermine consumes. In February, German manufacturing orders fell 0.5% (+0.8% expected) on the top of January's decline of 0.7%. Domestic order were unchanged, while foreign orders slid 1.1%. Euro/Usd is again challenging resistance levels EUR/USD is again challenging the important technical level near 1.60. A swing above 1.6070 would lift the Euro to 1.63, 1.65. A short term bearish correction would instead take form, if the market will move below 1.5280. The next target might then be 1.5220, 1.51, eventually, 1.45. GBP/USD is consolidating between 2.04 and 1.97. A decline below 1.9605 would possibly target 1.95. A move above 2.0250 would lift prices to 2.0350. USD/JPY reached to important resistance at 103.20. A breakout could target 104.00. The support at 100/99 is instead on target, if the market fails to move to higher levels. Source : Actionforex.com 5 Most Important Events for the Forex Market This Week Event risk for the forex market will be coming primarily from central banks this week, as the US dollar must grapple with the FOMC meeting minutes from March, the British pound may face a rate cut by the Bank of England, while the European Central Bank's rate decision and subsequent press conference could force volatile moves in the euro. What to Watch This Week FOMC Meeting Minutes from March 18 - April 8 On Tuesday, the minutes from the Federal Open Market Committee's March 18 meeting will be released at 14:00 EDT. During that meeting, the Fed cut rates by 75bps, though speculation that the Committee would actually cut rates by 100bps and two dissenting votes for less aggressive action by Richard Fisher and Charles Plosser led the US dollar to rally. The key thing to watch for in the release of the minutes is what sort of action the dissenters actually voted in favor of. Currently, fed fund futures are betting on a 25bp cut on April 30, but are pricing in a 36 percent chance of a 50bp cut. However, if Fisher and Plosser voted for only a 25bp cut, traders will likely start to bet that the rest of the Committee will follow their lead this month. Australian Employment Data - April 9 The Australian labor markets have tightened substantially over the past few years, as the unemployment rate has dropped to multi-decade lows of 4.0 percent. This has driven wages higher, boosted disposable income, increased domestic demand and economic growth in general, but has also fueled inflation. Indeed, the Australian labor markets are expected to add on another 10,000 workers in March, and like the US non-farm payrolls release, the figure rarely meets expectations and can lead to volatile short-term price action for the Australian dollar immediately following the news at 21:30 EDT. Bank of England Rate Decision - April 10 The Bank of England is expected to cut rates by 25bps to on Thursday. The rate decision will come at 7:00 EDT and will also include a monetary policy statement. Inflation pressures in the UK have not been quite as strong as in the Euro-zone, though CPI is still above the Monetary Policy Committee comfort zone. However, the credit crunch is taking a toll on the country's financial and housing sector, as mortgage lenders start to raise rates in an effort to avoid taking on new loans. This has stoked concerns that the UK is in for a US-style housing market collapse, or worse, an all-out recession. As a result, the risks are tilted very much to the downside for the British pound late in the week. European Central Bank Rate Decision - April 10 Unlike the Bank of England, the European Central Bank is widely expected to leave rates steady at 4.00 percent for the tenth consecutive meeting. The rate announcement will come at 7:45 EDT, but the big show is at 8:30 EDT when ECB President Jean-Claude Trichet will give his monthly press conference. Will he remain hawkish, or focus more on the instability in the markets? Estimates for Euro-zone CPI in March rocketed to a nearly 16-year high of 3.5 percent, as energy and food costs surge. On the other hand, the ECB has stepped in to inject liquidity into the money markets, as credit conditions remain tight. There's little doubt 'price stability' will be the foremost concern for Trichet, but if he suggests that price pressures will moderate in the near-term or that feeble financial market conditions are threatening economic growth, the euro could actually sell-off across the majors. The Stock Market Saga Continues... The end of last week was quiet... perhaps a little too quiet. Periods of tight consolidation tend to lead to breakouts, leaving US equity indexes like the DJIA prone to sharp moves and high volatility. Forex traders should be aware of this price action as well, since major movements in the stock markets tend to impact carry trades like USD/JPY and GBP/JPY.