The Federal Reserve is Observing Events

The long term trend stays bearish, but the U.S. dollar might follow a period of consolidation with the Federal Reserve adopting a more neutral stance and the European Central Bank holding rates steady. In the mean time, during the first quarter of 2008, final real domestic demand in the United States declined for the first time in almost twenty years.

The U.S. economy is moving, but not out of the woods yet

After declining for five straight months, the RBC Cash index for May, a monthly national survey of consumer attitudes, rose 9.5 points to 39 from 29.5 in April. Probably only a brief pause before the downtrend will resume, as the index is still far away from the pick of 103 touched in February 2007. In fact, inflation remains a global threat, even though the growth of the total supply of goods and services produced is overcoming the growth of the total demand. A favorable situation which is helping to cool down the rampant commodity prices for now. The Federal Reserve should remain on alert with employment numbers worsening, consumes contracting and the final real domestic demand falling for the first time in almost two decades during the first quarter of 2008.

Nonetheless, the international trade is an important asset to the U.S. economic growth this year, especially if the U.S. dollar is so competitive. In March, the U.S. international trade deficit fell to US$ 58.2 billion (US$ 61.0 billion expected) from February's US$ 61.7 billion. Imports slid 2.9%, while exports declined 1.7%, after increasing for twelve straight months. The positive numbers are confirmed by the U.S. ISM non-manufacturing index, which moved up to 52 in April (49.0 expected) from March's 49. The employment index rose to 50.8 from March's 46.9 and new orders were almost unchanged. Data should be checked again in the coming months, since domestic vehicle sales were the lowest of the past sixteen years. Nonetheless, the unexpected dynamism is reflected in wholesale sales, which rose 1.6% in March compared to February's fall of 0.5%. As a result, wholesale inventories moved down by 0.1% (+0.5% expected) versus March's +0.9%. Durable goods increased 0.3%, while non-durable goods declined 0.7%.

ECB holding, as the economy is contracting

As expected the European Central Bank (ECB) left rates unchanged at 4.00% last week. During the following speech, president Trichet confirmed that the main priority is inflation, since growth is still on target, albeit moderating. It is clear that only a deep downturn of the European economy would change ECB policy. A change that is not foreseeable in the nearest future with crude oil targeting new highs every day. In fact, the Euro zone Producer Price Index (PPI) moved up 0.7% month on month in March and increased 5.7% from 5.4% on an annual basis.

In reality, the stellar euro and a rampant inflation is hitting consumes in Europe. German manufacturing orders, as an example, fell 0.6% (+0.3% expected) in March from February's decline of 0.6%. Annually, orders declined 5.0%, the first down move of the past three years. A preliminary report from the FSO (Federal Statistical Office) showed that German trade surplus decreased to 16.7 billion (17.0 billion expected) from 16.9 billion in February. Month on month, exports fell 0.5% and imports increased 0.8%.

During the same month, German industrial production slid 0.5% and France industrial production moderated 0.8% (-0.4% expected) month over month from February's 0.5%. Finally, Euro zone retail sales receded 0.4% in March (+0.1% expected) versus February's decline of 0.2%. On an annual basis, retail sales slid 1.6% (-0.6% expected) from February's up move of 1.0%.

Euro/Usd support holding so far

EUR/USD found an important support on the lower Bollinger band at 1.53. The short term trend is neutral. A move above 1.5660 would lift the European currency to 1.5720, 1.58. A decline below 1.5220 would instead target 1.5140, 1.5050.

GBP/USD just reached the important support a 1.9500 without much conviction so far. The next target could eventually be 1.9420, but only a move below 1.9320 would inspire a strong declined. Higher levels are instead possible, if the market fails the decline below key prices. In that case, the first target is 1.96, then 1.98.

USD/JPY the resistance level at 105.50 held and the market is declining to the important support at 102.60, 102. It is at the conjunction of various support lines and should again hold at first touch. A move below 101.20 could eventually target 100.70, 100.00. A breakout failure could take prices back to higher levels.

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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