Economic Data Confirms EuroZone Recovery, U.S. Dollar May Be In Near-Term Trouble
Thu, Aug 26, 9:41 AM ET, by ForexTraders.com
Risk aversion capital flows have been dominating the market the last several weeks as concerns surround the global economic recovery continue. The GBP/USD hit a HI of 1.6000 and the EUR/USD hit a HI of 1.3300 before both pairs fell precipitously during the last few weeks. It is now abundantly clear to investors that the United States recovery is faltering. Fed Chairman Ben Bernanke has stated the economic outlook for the United States is "unusually uncertain." This dovish outlook from Bernanke has been somewhat echoed by Bank of England Mervyn King, and this negative outlook for the 2nd half of 2010 has caused investors serious concern and there just aren't enough buyers in the market to push risk currencies higher. That could change soon, however.
We have been writing lately about the major problems the EuroZone will most likely face this fall as periphery countries including Greece, Portugal, Spain, Ireland, and Italy continue to struggle to stimulate economic growth. Greek yield spreads are reaching very high levels versus German debt and Ireland's credit rating was downgraded this week from AA to AA-. However, in spite of the concerns in the EuroZone of possible future problems in these periphery countries, the EuroZone continues to post positive key economic data that is consistently surpassing market expectations. At the moment investors are still being gripped by the concerns in the United States and the fact the global recovery is slowing around the world. However, attention may soon shift to the theme of growth, and if this happens, the U.S. Dollar may be in for a hit in the near term.
Yesterday the U.S. posted severely disappointing economic data as Durable Goods Orders came out at -3.8% versus the expected 0.6%, and New Home Sales came out at 277k versus the expected figure of 333k. These numbers are only serving to confirm the very poor economic conditions in the United States. Many experts are beginning to fear the possibility of a double-dip recession. The U.S. is in a precarious position. Federal Reserve Chairman Ben Bernanke has made it clear that the Federal Reserve will do everything in its power to stimulate economic growth even if that means printing an endless amount of money. Thus, the Fed is seriously considering another round of quantitative easing.
The problem is that today the S&P went public and said the U.S. should immediately move to protect its AAA rating. This is pretty big news and it creates a big problem for the U.S. It is imperative that the U.S. keep its AAA rating. It needs very low interest rates and low borrowing costs in order to finance its huge deficits and if the AAA rating is lost, it will be forced to pay higher borrowing costs. The trouble is that if further quantitative easing measures are introduced they could serve to really challenge the AAA credit rating the U.S. has right now. On the other hand, if the Fed does not introduce another round of quantitative easing measures, many experts are concerned the economy will slip into a double-dip recession. The U.S. is definitely in a precarious position.
Today, the Federal Reserve is meeting in Jackson Hole, WY to discuss the current economic conditions and finalize a game-plan for monetary policy in the 2nd half of 2010. After meetings all day today, Fed Chairman Bernanke will speak at 10:00 am tomorrow morning. During this speech, he will most likely make it clear whether the Fed will be moving forward with QE measures.
So, back to our original point-the EuroZone recovery is currently moving forward in much stronger fashion than the U.S. recovery. Due to the concerns surrounding the entire global recovery, risk aversion capital flows have been dominating the FX Market for the last few weeks as the euro and pound have both fallen significantly versus the dollar, but that could begin to change now in the near-term. If investors return focus back to growth, it is apparent that the severe slow-down is currently being relegated to U.S. shores, while the EuroZone and U.K. continue to post positive key economic data. This could cause investors to begin questioning the need to hold U.S. Dollars, and we could see a very large move against the Dollar in the near-term. We still hold the view that the EuroZone will face another round of major sovereign debt concerns this fall, but in the near-term we could see some more euro and pound strength. Friday News ReleasesU.K. Revised GDP
U.K. growth has slowed and unemployment is remaining at stubbornly high levels, especially in the financial services sector, which is a backbone of the U.K. economy. Bank of England Mervyn King has been quite dovish on the U.K. economy, but then the BOE Minutes last week were much more optimistic than expected, so there is a bit of mixed messaging coming out of the U.K. at the moment. Tomorrow's GDP figure could help to tip the scale in one direction. Although the figure will most likely come out as expected, if there is a surprise to the upside or downside, we could see the pound either weaken or strengthen accordingly as investors get a clearer gauge of U.K. economic growth.
U.S. Prelim GDP
The major concern surrounding the global recovery at the moment is United States growth. It has slowed significantly, and many experts are concerned there is a real possibility of a double-dip recession in the U.S. Unfortunately, recent economic data has confirmed these fears, and it is now clear the U.S. economy is facing severe challenges. This GDP figure should serve to give investors a clear picture of the current economic climate in the U.S. The expected figure is 1.5%, and this figure has already been downgraded from previous estimates earlier in the year, so if there are any surprises to the downside, it could be catastrophic for the U.S. If GDP comes out below 1%, it will most likely cause a certain degree of investor hysteria as the possibility of a double-dip recession will increase dramatically.
SDI Glossary: "the Fed" Definition
SDI Glossary: "GDP" Definition
SDI Glossary: "Risk" Definition
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