Euro Recovery Halted by Weaker Industrial Production (page 1 of 2)

DailyFX Fundamentals 02-14-08

By Kathy Lien, Chief Strategist of DailyFX.com


Dollar Takes a Nosedive After Federal Reserve Lowers Growth Forecast

With the US economy deteriorating, we have been very suspicious of the recent dollar rally. The rebound has been primarily attributed to the hope for a shallow downturn and a swift recovery, but today's comments from Federal Reserve Chairman Ben Bernanke suggests otherwise. In his testimony to Congress, Bernanke warned about the downside risks to growth and despite the recent recovery in consumer spending, he expressed concern that the weakness of the labor market will pressure consumer spending going forward. As a result, the Federal Reserve will be lowering their projections for US growth next week. Back in November, they projected growth to be between 1.8 to 2.5 percent in 2008. To put these numbers into perspective, the market expects the Eurozone to grow by 1.8 percent this year as well. The US central bank stands ready to act in a timely manner" which means that they plan on cutting interest rates further. Before getting too excited however, Bernanke also stressed that monetary policy works with a lag. He may be telling us that the Fed plans on slowing down because the economy needs time to absorb the recent rate cuts. Easing interest rates too sharply over a short period of time could backfire, by driving up inflation pressures and making it difficult to fight inflation if the economy continues to slow. Bernanke's comments completely overshadowed the better than expected trade balance. The deficit fell from $63.1 billion to $58.8 billion as the weaker US dollar drives exports to a record high. This confirms the improvements that we have seen in the manufacturing sector. Tomorrow, we have a very long list of US data due for release including Import Prices, the Empire State Manufacturing Survey, the Treasury International Capital Flow report, Industrial Production and the University of Michigan Consumer Confidence report. Aside from confidence, we expect most of the numbers to be dollar bullish.

Euro Recovery Halted by Weaker Industrial Production

The Federal Reserve's continued for concern about growth and the European Central Banks "mixed messages" has helped the Euro rally another 100 pips. According to the ECB's February monthly bulletin, the central bank is really not sure how much of an impact the turmoil in the financial markets will have on the real economy. Quaden believes that slower growth could actually bring higher inflation while Gonzalez-Paramo sees no sign of a hard landing for the economy. This follows slightly better than expected fourth quarter GDP numbers. Growth slowed from 2.7 percent to 2.3 percent, which was slightly better than the market's 2.2 percent forecast. Even though the Swiss franc is stronger across the board today, we had very bad Swiss data released this morning. The ZEW survey of analyst sentiment dropped to a record low while the unemployment rate jumped from 5.6 to 6.4 percent. UBS also reported $13.7B in write downs, the biggest loss by a bank in the fourth quarter. These numbers make a rate hike from the Swiss National Bank very unlikely. Swiss retail sales and the Eurozone trade balance are due for release tomorrow. Both numbers should reflect continued deterioration.

Bank of Japan Not Expected to Raise Interest Rates

The Dow dropped 175 points today, erasing nearly all of yesterday's gains, but carry trades were mixed with some pairs like AUD/JPY and CHF/JPY gaining strength while others like GBP/JPY and USD/JPY selling off.