Eurozone Growth Continues to Slow (page 1 of 2)

DailyFX Fundamentals 07-10-08

By Kathy Lien, Chief Strategist of DailyFX.com

Another big surprise for the Dollar

The currency market was fairly quiet today with the US dollar rallying against some currencies and falling against others.

Jobless claims were the only piece of data released and filings for unemployment dropped by 58k to the lowest level in three months.

The goods news however was shrugged off by the markets because the data is distorted by seasonal shutdowns in auto plants.

This happens every summer in the month of July and lasts for about two weeks.

According to the Labour department, their seasonal adjustment formula prices in auto layoffs in the first two weeks of July and fewer occurred last week than expected.

Excluding the seasonal adjustment, claims actually increased by 30k while continuing claims rose by 91k.

With companies such as Starbucks, Citigroup and Air Tran announcing layoffs in the past month, the labour market will worsen before it improves.

Despite the bad news, the US dollar may be in for a big surprise.

A difficult labour market, the decline in the stock market and the rise in food and energy prices are expected to force US consumers to reduce spending.

However judging from the monthly reports from retailers, consumer spending may not be that bad.

Discounters like Wal-Mart, Costco and Target all reported stronger sales in the month of June as consumers continue to spend their tax rebates.

If retail sales remain positive, the US economy may avoid double dipping, which would be a nice surprise for the US dollar.

Fannie Mae and Freddie Mac's potential solvency problems were the biggest news in the financial markets today. They are too big to fail and we believe that the US government will exhaust their options before allowing this to happen because preventing or mitigating future crisis is Bernanke and Paulson's top priority.

Fed President Yellen even said today that the Fed has the potential to further ramp up facilities if needed.

Meanwhile the US trade balance and consumer confidence reports are due for release tomorrow. The rise in the export component of the manufacturing ISM report suggests that the trade balance will improve, but any dollar rally could be offset by the consumer confidence report which will be released shortly thereafter.

More strain on the US economy should lead to weaker consumer confidence.

Eurozone growth continues to slow

The Euro strengthened against the US dollar but that does not correctly reflect the outlook for the Eurozone economy.

French and Italian industrial production both dropped significantly in the month of May which is consistent with the decline that has already been reported in Germany and Spain.

Based upon these numbers, GDP should have remained unchanged in the second quarter, which compares to the 0.7% growth reported in Q1.

The Eurozone economy is undoubtedly struggling and the catalyst that will break the EUR/USD out of its current range is evidence that one economy (the US or the Eurozone) is deteriorating much faster than the other.

This could very well be the Eurozone, which is only beginning to suffer. There will be no Eurozone economic data due for release tomorrow, which means that the price action of the currency pair will depend upon US data and the fluctuations in the Dow.