An impotant week for EUR (april 3-7,2007)

[jgerousis]

**** COURTESY OF FOREXNEWS.COM ****
An important week for the European currency?
by Angelo Airaghi [Guest Analyst]
4/2/2007

Although moderating, consumer spending in the United States remains strong, helped by income gains and persistent employment growth. Inflation pressure, on the other hand, is consistent and will possibly keep the Federal Reserve on the sideline for the near future, even though the economic growth would slow down compared to the fourth quarter of 2006. The cross Euro/Usd is still at the highest level of past two years and a clear indication of medium term market direction should be soon expected.

In the United States, the economy is mildly contracting


Recent data appear to confirm that consumer spending might likely soften in 2007, but it should maintain its overall positive tone. In March, the Conference Board's Consumer Confidence Index, based on a sample of 5.000 U.S. households, fell to 107.2 from a downwardly revised 111.2 in February. Expectations were for a moderate decline to 108.5. The reasons? A milder employment growth, increasing oil prices and declining stock trends. The Present Situation Index climbed to 137.6 from February's 137.1 reading. Future’s overview was more pessimistic as well. In fact, the Expectations Index declined to 86.9 from 93.8.

In February, U.S. headline durable goods order rebounded to 2.5%, but they were below forecast of a 3.5% rise. Excluding transportation, numbers were worst than expected (+1.8%) by declining -0.1%. Core orders, which could be paired with machinery and equipment spending, fell at a 21.5% annualized pace in the first two months of the year. The much weaker than expected business spending showed in January and February might be anticipating a downside contraction for the U.S. first quarter Gross Domestic Product (GDP). In the fourth quarter of 2006, the final print of real GDP showed a 2.5% annualized gain. It was an unexpected upward revision from the previously reported 2.2%, forecasts had anticipated a steady growth rate at 2.2%. The consumer and trade sectors remained the strongest support for the economy with weakness located in fixed investment.

Despite the housing sector, the Federal Reserve should hold rates steady for now

Last week reports suggest that in the near future, the Federal Reserve will maintain its holding policy on interest rates, considering a slower, but persistent, pace of growth of the U.S. economy and the consistent inflation’s level. In effect, Friday’s data seems to testify just that. In February core PCE deflator, closely observed by the Federal Reserve, increased by 0.3% month over month and 2.4% year over year, reaching last September’s peak. At the same time, personal income jumped more than expected by 0.6%, down from 1% printed in January. Market forecasts anticipated a 0.3% increase. Construction spending rose 0.3%, the best move in 11 months, helped by private non residential construction. Analysts had expected a 0.6% fall. Finally, Chicago Purchasing Management Index (PMI) showed a spectacular rebound to 61.7 in March, the best number since April 2005, and above market call of 49.2.

New home sales, once again, declined 3.9% to a seasonally adjusted annual rate of 848,000 units in February. Market forecasts had been anticipating a 5.7% monthly gain. January sales were also revised lower to 882,000 units from 937,000. The average price of new single family homes was 0.3% lower than the level reached one year ago. The months' supply of inventories at current selling rates jumped to 8.1 months (January was 7.3 months), the highest monthly supply since January 1991 and well above the 6.4 month average of 2006. After eroding more than one percentage point from the economic growth in the second part of 2006, residential construction is likely to remain one of the weakest spot of the U.S. economy. There are, nonetheless, some positive aspects regarding new home sales. Mortgage rates, as an example, have moved lower in March, while the MBA purchase applications index, an indication of sales activity, has climbed on average so far in March.

European inflation numbers closely watched by the European Central Bank

Despite different indications from other European countries, corporates German optimism increased in March holding near record highs. German IFO Business Climate Index, calculated on the basis of 7000 monthly survey responses from various business sector firms, posted an important rise to 107.7 from 106.5, reversing the pattern of two consecutive monthly declines. Business cycle expectations remain steady with a strong economy and should be strong in the future as well, although moderating. German GfK Consumer Confidence for April moved higher by 0.1 to 4.4, slightly below forecasts of 4.5. Specifically, willingness to buy improved by 3.7 points to minus 12.3 points and income expectations increased by 13.0 to 15.9.

March German preliminary Consumer Price Index (CPI) rose 0.1% month over month, 1.9% year over year, above expectation of 1.7% year over year rise. The Harmonized Index of Consumer Prices (HICP) climbed 2.1% on year versus 1.9% registered the prior month. Lastly, Eurozone M3 moved to 10.0% annually in February, above both forecasts of 9.8% and the ECB's annual reference rate at 4.5%. The steady growth of money supply, which is now two times that of 36 months ago, will surely be on President Trichet agenda, considering his messages on accommodative interest rates and vigilance.

Euro is at key technical levels

Technically, the European currency still appears to be overstretched in its recent move to 1.3410/1.3450. The divergence between current chart pattern and the Rsi indicator index weights on the Euro and could anticipate a correction or a short/medium term market reversal. A decline to 1.3240 is then a possibility, eventually 1.3150/1.310, if 1.3180 is overcome. A swing above 1.3480 will instead rise the Euro toward 1.36, 1.37.