Eurozone Economy Continues to Slow (page 1 of 2)

DailyFX Fundamentals 7-18-08

By Kathy Lien, Chief Strategist of DailyFX.com

US Dollar: New week, same drivers

It has been a very volatile week for the US dollar, even though compared to the beginning of the week, the exchange rate for the EUR/USD and USD/JPY has remained virtually unchanged.

On Monday, the EUR/USD was trading at 1.5922 while USD/JPY was trading at 106.26, not far from current levels, but of course these rates masks what can only be likened to a rollercoaster ride in the financial markets.

There was a number of event risks and economic data released over the past week, yet the drivers of the financial market volatility can be boiled down to two things; the health of the financial sector and oil prices.

We have come a long way since traders first speculated about the possible demise of Fannie Mae and Freddie Mac.

The Federal Reserve and the Treasury have offered different solutions to avert more serious problems while Freddie Mac has announced plans to raise capital by selling as much as $10bn in new shares to investors.

Based upon the 600 point recovery in the Dow off of Tuesday's intraday low, for the time being traders believe that this could be enough.

JPMorgan and Citigroup have reported better than expected earnings even though Merrill Lynch disappointed; two out of three appears to keep the markets happy for the time being.

As for economic data, we learned that inflation remains hot but consumer spending is beginning to falter.

With the US economic calendar considerably lighter next week, the health of the financial sector, oil and the stock market will continue to set the tone for the FX markets.

Earnings season is in full swing. Bank of America will be releasing their earnings report on Monday and for the rest of the week there will be a number of regional banks reporting.

Leading indicators, durable goods, the final July UMich consumer confidence numbers, new and existing home sales are due for release along with the Federal Reserve's Beige Book report.

We will be keeping a particular close eye on the Beige Book report because it will serve as a temperature gage for how the US economy is really doing and how businesses and consumers may coping with the latest developments in the stock and commodity markets.

Eurozone economy continues to slow

The Euro is consolidating near its all time highs against the US dollar, even though we are reminded on a near daily basis about the risks to Eurozone growth.

Last night I was having dinner with a businessman from France and he described to me the sour mood in Europe.

He indicated that businesses are growing very pessimistic which confirms that Europeans are tightening their belts as they learn to deal with high prices.

This conversation comes at a perfect time because the marquee release on the Eurozone calendar next week is the German IFO report of business confidence.

Like the ZEW survey of analyst confidence, business confidence should have deteriorated materially over the past month.

Not only did the European Central Bank raise interest rates for the first time since June 2007, but exports, factory orders and industrial production have also plummeted which confirms that business activity has dropped significantly.

The only wrinkle to this outlook was the sharp rebound in German retail sales, but we think that this should be a mute point since higher energy prices was a big reason for the increase in spending.