Interest rates: perception versus reality
Rates should remain on hold for now in the U.S, as the concentric work by the Federal Reserve and the U.S. Treasury department to bring the economy back on track must take its course. Nevertheless, the perception of a change in policy rates could be beneficial for the U.S. dollar and help commodity prices to regress a bit in the coming weeks/months. The Federal Reserve is watching events carefully and acknowledged that the economic activity stays generally weak. In fact, the Fed beige book for May showed higher risks to growth with strong commodity prices penalizing consumes. Consumer spending, about 70% of the Gross Domestic Product (GDP), declined, while inflation is rising in most of the districts.
In effect, unemployment is increasing and household wealth is shrinking in the United States. The fall of 49,000 payroll jobs in May, better than the expected 60,000, got some support from health care and restaurants, while all other private sector jobs lost people. In addition, consumers are less optimistic about the current and the future state of the economy and inflation is expected to increase in the coming months. The Reuters/University of Michigan consumer confidence index slid to 56.7 in June, the lowest level of the past twenty-eight years, from May's 59.8.
Tax rebates are getting into the system
The results of the fiscal stimulus must be analyzed over a reasonable period of time, although the US$ 50 billion tax rebates sent out in May might be already running its course. Retail sales, as an example, increased 1.0% and rose 1.2% excluding the volatile auto components. Maybe, a timid sign that the economy is trying to stabilize at this levels. In effect, sale increase were homogeneous among all the components with gasoline stations leading the way, but also restaurant meal, consumer goods and government data were supportive.
In reality, the international trade remains the cornerstone of the U.S economy, while the U.S. dollar stays so competitive and domestic demand is weak. In April, the U.S. international trade deficit increased to US$ 60.90 billion (US$ 60.0 billion expected) from the US$ 56.5 billion registered in March. Exports rose to 3.3% and imports moved up 4.5%. For now, however, inflation is moving strongly higher, supported by high energy and food prices. In May, the all items Consumer Price Index (CPI) rose 4.2% year on year (+3.8% expected) and moved up 0.6% month on month (+0.5% expected). Excluding the volatile food and energy components, inflation was steady at 2.3% annually and increased 0.2% versus the previous month.
Europe: inflation is still on focus
Like the United States, expectations for higher rates are increasing among European investors. The European Central Bank (ECB) maintains prices on focus, but only time will tell if a rate increase could be beneficial to a slowing economy. In effect, rising oil and food prices are getting deep into consumers pockets. In Germany, Consumer Price Index (CPI) move up to 3.0% year on year in May from April's 2.4%. Inflation is still above the European Central Bank (ECB) benchmark of 2.00% and it appears very unlikely that it will regress much over the short/medium term. During the same month, the German wholesale price index increased 8.1% (7.1% expected) year on year and moved up 1.4% on a monthly level (+0.7% expected). It has been the largest yearly move in twenty-six years when prices reached 8.5%. Finally, the French Consumer Price Index (CPI) increased 0.5% month on month in May and moved up 3.3% (+3.6% expected) on a yearly basis.
In reality, only Germany is keeping up the strong economy momentum, while other key European nations are fighting to stay above water. In Germany, the trade balance manifested a surplus of Euro 18.7 billion in April (15.6 billion expected), from March's gain of 16.6 billion. Annually, export rose 13.9%, despite the stellar Euro, and imports moved up 11.7%. The current account fell instead to Euro 14.5 billion from 17.5 billion. The Bank of France, at the contrary, cut second quarter Gross Domestic Product (GDP) estimate for France, based on a monthly survey of business leaders, to 0.2% from 0.3%. The business sentiment index declined to 97 from April's 100, as new orders are falling and inventories are increasing. A challenging period for French consumers, albeit French industrial production increased 1.4% (+0.3% expected) in April from March's decline of 1.0%.
EUR/USD: tight consolidation continues
EUR/USD is moving within a tight range from 1.59 to 1.54. They correspond to the higher and lower Bollinger bands. The market is currently at lower band. Only a break out could target 1.52, 1.50. A breakout failure could take the price back to 1.56, 1.58, eventually 1.62, if 1.5980 is overcome.
GBP/USD is oscillating between 1.99 and 1.94. Price is again at the lower band at 1.94. A move below 1.9260 could target 1.9060. Failure to move to lower levels would lift price to 1.97, 1.9850.
USD/JPY moved out from the important resistance at 107.40 and is targeting 108.10/109.00. It is at the conjunction of the 200 days MA and the higher channel. It should hold at first touch. A breakout from 109.80 could target 110.50, 112.00. A breakout failure could take the price back again to 107.00, 106.00.
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.
Legal disclaimer and risk disclosure
MG Financial Group, or any of its related companies, will not be held responsible for the reliability or accuracy of the information available on this site. The content provided is put forward in good faith and believed to be accurate, however, there are no implicit guarantees of accuracy or timeliness.
source : http://www.actionforex.com
No comments:
Post a Comment