Euro Rises, Pound Stumbles and will EUR/USD Break 1.5000?
The Euro rallied above 1.4250 on comments from German Finance minister Peer Steinbruek and French GDP showing growth in the third quarter. The German finance minister told the Hannover-based Neue Presse newspaper that Germany is situated to handle the current economic crisis and that the country has yet to decide on the size of the next stimulus package that is expected in January. Meanwhile, the final 3Q French GDP reading confirmed the preliminary print of 0.1% growth.
Signs that the Euro-zone’s two biggest economies are proving to be more resilient than expected, has lowered expectations that the ECB will resume its current easing policy. Falling oil prices and inflation led to an increase in French consumer spending which drove growth in the third quarter offsetting declining manufacturing activity. Indeed, the German Finance minister also cited the drop in prices as the source for his optimism as real disposable incomes rise. However, we saw Italian business confidence fall to a record low of 66.6, which continues the trend that we saw in Germany and France. If businesses continue to slash payrolls to reduce expenses, consumer spending may begin to weaken and weigh on domestic growth. Another test of the 200-Day SMA is a possibility, but until we see a break above this technical level the downside risks remain.
The Pound pared earlier gains dropping over 100 points, as the outlook for consumer spending took a significant blow. A Guardian/ICM poll said 86% of Britons will make spending cutbacks in 2009. Additionally, 43% of firms polled by the British Chamber of Commerce plan to freeze wages and salaries in 2009, which has lowered expectations for domestic growth. The declining housing market has also added to the decline in wealth, which led to Britons putting in £5.7 Billion into their homes according to the BoE housing equity withdrawal report. It was the most since records began in 1970 signaling that spending on big ticket items like cars and vacations will halt as households refrain from pulling equity from their homes.
An empty economic calendar will leave dollar price action at the mercy of risk flows today. Despite a bout of risk aversion due to violence in the Middle East the dollar didn’t benefit from the increased risk aversion which saw oil and gold shoot higher. The thin holiday trading could lead to increased volatility as institutional buyers have a greater impact on price action. Bargain hunting could drive equity markets higher today and the resulting risk appetite may weigh on the greenback. Additionally, as the dollar continues to trade more on fundamentals the weak holiday shopping season may lower growth expectations for 2009 and add to dollar selling.
Will The EUR/USD Break 1.5000?
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Posted on December 29, 2008
at 11:05 am
Written / posted by: Piere
Filed under: Currency Trading, News, forex trading