Awaiting Fed's Decision

While the Federal Reserve is preparing another rate cut at the end of April, the European Central Bank (ECB) has enough room to postpone any intervention further into the future. In effect, ECB officials still promote a strong Euro, as a medicine against a rampant inflation. Nonetheless, the technical picture might delineate a different short/medium term scenario for Euro/Usd, if key technical levels are not overcome.

Inflation is aggressive, but the Federal Reserve should cut rates again

In March, the Producer Price Index (PPI) increased 1.1% (+0.6% expected) and the core index moved up 0.2% (+0.4% expected). The long bull trend in all commodity prices, that began in the year 2000, is here to stay. In fact, energy prices rose 2.9% month over month and are now up 20.4 year over year. Foods moved instead +1.2% and increased 5.8% on a yearly basis. Annually, PPI is at 6.9%, only a fraction below January's 7.4%. The Consumer Price Index (CPI) rose instead 0.3% month over month supported by energy products. March's increase was expected, but the core rate shows +2.4% from February +2.3%.

Despite inflation moving higher, the Federal Reserve should again cut rates at the end of this month by 25/50 basis points and probably in the coming months as well, so to bring fed funds rate below 2.00%. Nevertheless, some pauses might be possible to see how the fiscal stimulus package will impact consumer spending. Almost US$ 120 billion will return into taxpayer pocket this summer. Most of the money will be used to repay debt or into saving accounts, but between 15%/25% should support consumes.

In effect, last week Beige Book confirmed that the economic slowdown is increasing over many of Fed districts (9 of 12). How? First, housing remains very weak, even though some improvements in residential mortgage lending by banks has taken place. Second, consumer spending is falling across the country, as credit is fading away. The bright spots of the U.S. economy are tourism, agriculture and the energy sector.

Growth might decline further

Retail sales increased 0.2% in March, slightly above expectations, compared to February's -0.4%. Cores sales, excluding auto components, were almost unchanged at 0.1%. The worst is not over the economy in the United States, as high inventory levels are keeping the housing market in a steep downtrend. In March, housing starts fell almost 12% (-5.4% expected) and permits slid 927,000 units. The decline was broad based and covered single (-5.7%) and multiple family homes (-24.7) in all the four regions of the United States.

Industrial production, at the contrary, moved up 0.3% in March (-0.1% expected) versus February's decline of -0.7%. Capacity utilization rose to 80.5% from 80.3%. Manufacturing showed a tiny gain, while durable goods fell 0.1%. Business equipment (an indicator of capital spending) moved up 0.6%. Industrial production was almost unchanged during the first quarter of 2008 and should have a minor growth, in any, over the next months.

In Europe, economic slowdown just beginning

The Federal Reserve is cutting rates again and the European Central Bank (ECB) holding them steady. It has been the scenario of the past few months and should continue for some more time as well. At least, until the economic slowdown reaches deeply into the European continent. Signs of a contraction are becoming evident, although they are not strong enough to determine a change in rate's policy. The German ZEW of investor sentiment index, as an example, declined to -41 from -32 (-30 expected) in April.

For now, however, the trend is still up in most of the economic sectors. In the Euro zone (fifteen nations) industrial production climbed 0.3% in February (+0.2% expected), below January's +0.6%, but still up 3.1% on a yearly basis. During the same month, the Euro zone trade balance with the rest of the world registered a surplus of Euro 8 billion (-Euro 4 billion expected) versus the deficit of Euro 11 billion shown in January. Exports moved up 13% year on year, while imports rose 11%. Finally, Euro zone construction increased 1.2% month on month in February compared to January's move of +2.5%. Annually, construction rose 4.3%. In January, it was +3%.

Inflation remains a constant menace in Europe and reached sixteen months high. The Consumer Price Index (CPI) flash estimate for February printed 1.0% month over month and 3.6% year over year from February's +3.3% Core inflation was 1.0%. In Germany, the Producer Price Index (PPI) increased by 0.7% (0.5% expected) month on month in March, unchanged from February. The annual rate is 4.2%, from February's 3.8%.

Euro/Usd: a breakout failure would increase selling pressure

EUR/USD is facing a strong resistance at 1.59/1.60. This important technical level is at the conjunction of various resistance lines and must be overcome with decision for higher prices. Consequently, a swing above 1.6070 is necessary for 1.63, 1.65. A bearish correction would instead take form, if the Euro fails to move to higher prices. In that case, Euro could decline to 1.55, 1.54. In effect, a bearish divergence between current prices and the Rsi indicator on the daily and weekly chart is forming. A decline below 1.5270 would eventually target 1.50.

GBP/USD has quickly rebounded from the support at 1.96/1.97. A move above 2.0050 would target 2.01. A breakout failure could take the price back again to 1.97.

USD/JPY moved away from the support at 100. The next target could be 105.00, eventually 106.00. Provide the market remains above 101.70.

Angelo Airaghi
MG Financial Group
http://www.mgforex.com

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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