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While the European Central Bank (ECB) is till favouring inflation over growth, despite clear signals of contraction in Europe, for the Federal Reserve would be challenging to rise rates under current economic environment. The economy is struggling to find a bottom in the U.S., although the fiscal stimulus package is giving some relieve to consumers. The U.S. dollar, in the mean time, is still trapped in the tight rage.

Credit standards tightening in the U.S.

Downside risk to growth remains elevated, unemployment is increasing and household wealth is shrinking in the U.S. Credit cards have helped consumers to find liquidity (credit card usage is about 8% from 2%-3%) thus far, but the trend could not last for long with banks becoming more demanding on credit card standards. As a result, for the Federal Reserve would be challenging to rise rates in current economic environment. U.S. car sales slumped to 13.6 million units annually, the worst results in fifteen years, and payroll employment fell 62,000 units (61,000 expected) in June, following May’s down move of 62,000. The decline was broad based with only government (+29,000) and hospitality (+24,000) showing some gains.

The unemployment rate, at the contrary, stays unchanged at 5.5%, but domestic demand is fading. In June, the Institute for Supply Management’s Index (ISM) for the manufacturing sector rose to 50.2 (48.4 expected) from May’s 49.6. Nonetheless, the index must be observed over the next months, since internal demand declined 3.5% month on month. Inventories and foreign orders appear to be responsible for much of the gains, as new orders declined to 49.6 from 49.7 and employment fell to 43.7 from 45.5. In effect, the U.S. service sector declined in June to 48.2 (51.1 expected) from 51.7. The contraction was distributed among all the index components. New orders fell to 48.6 from 53.6. Business activity slid to 49.9 from 53.6 and employment moved down to 43.8 from 48.7, the lowest level since 2001.

ECB’s decision not useful?

The European Central Bank (ECB) rose interest rates by 25 basis points to 4.25 last Thursday. During the following speech, President Trichet underlined mounting inflation risks, rising wages and living costs. In effect, in the Euro zone (fifteen nations), the Consumer Price Index (CPI) moved to 4% (3.9% expected) year on year in June from May’s 3.7% and the Producer Price Index (PPI) rose to 7.1% (6.7% expected) in May versus April’s 6.2%. However, Mr. Trichet acknowledged that inflation might moderate a bit in 2009, but it will remain above 2.00%. The economic outlook was at the contrary overall bearish. Uncertainty is growing and ECB has no bias for the future of European rates. In reality, ECB decision could only be a temporary medicine against increasing commodity prices and might hurt Euro zone growth over the medium term.

In May, as an example, German factory orders fell 0.9% (+0.7% expected) and orders are now down 2.0% from last year. Consumes are contracting, since domestic orders declined 2.7%. The Eurozone Services Business Activity Index is at 49.1 from 50.6 and the German PMI for services is 52.1 (53.3 expected) from May’s 53.8. Germany is suffering in some sectors, while others are keeping the momentum up. German’s unemployment rate, now at 7.8%, is the lowest of the past sixteen years. In June, the number of people out of work fell 38,000 (-14,000 expected) on a monthly basis. Finally, in May, Germany’s retail sales rose 0.7% (-1.0% expected) year on year from April’s decline of 0.2%. Monthly, sales increased 1.3% (+0.7% expected) versus April’s down move 0.6%.

EURO/USD testing support again

EUR/USD has failed to pass through the important resistance at 1.58/1.59. It is at the conjunction of various resistance lines and must be overcome with decision for higher prices. The European currency is currently reaching the important support line at 1.56, 1.5530. A move below 1.5480 would quickly target 1.5370, 1.5250. A breakout above 1.5940 is instead necessary to 1.6040, 1.6140.

GBP/USD found a strong barrier at 1.9970/2.000. The decline has quickly reached to important support level at 1.97, 1.9650. It should hold at first touch. Nevertheless, a move below 1.9620 would target 1.9530.

USD/JPY is moving within a tight range from 108.40 to 104.20. The market is currently testing the resistance at 107.70/108.00. It could hold initially. Nonetheless, a breakout above 109.10 would target 110.00.

USD/CAD is consolidating within 1.0310 and 0.9710. The support level at 1.005/1.010 has held so far. It could take the price to 1.0250/1.030. A move back below 1.0030 could instead target 0.9990, eventually 0.99.

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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