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Friday April 11, 2008 - 15:38:06 GMT
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FX Briefing - EUR-USD between fear and hope

FX Briefing 11 April 2008

Highlights

·        EUR-USD inches towards a new record high

·        IMF points out fragility of global financial system, lowers growth forecasts

·        BoE reacts to growth risks, ECB does not

EUR-USD between fear and hope
At 1.5915, EUR-USD just hit a fresh record high this week, only to fall back later during the trading session. Thus the euro failed to reach 1.60 for the third time in four weeks. Resistance is proving to be strong at 1.59, which EUR-USD has been around ever since the rescue of Bear Stearns. The euro also rose to a new all-time high of 0.8035 against the pound Sterling

Market players have been seesawing between returning risk appetite and latent fear of the credit crisis spreading further. Last week, hope had prevailed, which led to equity markets recovering significantly and credit spreads narrowing; this week, however, fear was uppermost again.

One reason for this was the International Monetary Fund’s very pessimistic outlook. In its Global Financial Stability Report, the IMF points out the fragility of the global financial system, with the leading industrialized countries being particularly vulnerable. According to the IMF, losses made by banks and other financial institutions, particularly in the US and Europe, could come to almost $1 trillion. The IMF therefore recommends prompt action to get the crisis under control. Central banks and their liquidity policy measures play an important role here. Moreover, the IMF is not ruling out the possibility of the credit crisis sparking a credit crunch; in that case, the global growth outlook would deteriorate markedly.

The forecasts presented in the IMF’s World Economic Outlook were correspondingly cautious. Although the IMF had already adjusted its growth forecasts down significantly in January, there was another sharp downward revision: for the US and Europe, which have been particularly hard hit by the financial market crisis, the IMF has lowered its growth forecasts for 2008 and 2009 by half a percentage point. Furthermore, the IMF is not ruling out the possibility that the financial market crisis could trigger a global recession. According to the Monetary Fund’s estimate, global growth would then drop to below 3 per cent.

The fairly pessimistic outlook for Europe came as a surprise. The IMF expects growth in the eurozone to be around 1.4% only this year, and 1.2% next year. This deviates considerably from the European Central Bank’s projections, which in March were still predicting 1.7 and 1.8% respectively. The ECB’s more optimistic outlook was also reflected in its monetary policy this week: as expected, the ECB Council left interest rates unchanged at 4%. However, at the press conference, Jean-Claude Trichet emphasized that downside risks to growth were unusually high due the fact that the credit crisis was lasting longer than initially expected.

According to Mr Trichet, the eurozone is experiencing a protracted, but temporary, period of accelerated inflation due to increases in food and commodity prices. The ECB is committed to preventing second round effects to ensure that price stability is maintained in the medium term. In our view, the economic outlook in the eurozone will deteriorate further in the coming months, as predicted by the IMF, giving the ECB scope for interest rate cuts too, despite the fact that inflation rates are high, or even still rising.

As expected, the Bank of England reacted to the increased growth risks this week by cutting interest rates by a further 25 basis points, despite the possibility of a further rise in inflation rates in the coming months.

We are thus not expecting EUR-USD to break through current resistance for any length of time. Nor are we expecting the impending meeting of finance ministers and central bank presidents in Washington to have a significant impact.

Next week the markets are more likely to be influenced by fundamental factors rather than politics. The first economic indicators for April are due to be released, and furthermore, the reporting season has just started in the US, and next week the focus will be mainly on banks’ results.

Uwe Angenendt +49 69 718-3648

Economics Department
+49 69 718-3642
volkswirtschaft@bhf-bank.com
Foreign Exchange Trading
devisenhandel@bhf-bank.com
Jörg Isselmann
+49 69 718-2695
Matthias Grabbe / Klaus Näfken
+49 69 718-2688

 
This report has been prepared by BHF-BANK Aktiengesellschaft on behalf of itself and its affiliated companies (together "BHF-BANK Group") solely for the information of its clients. The information and opinions in this document are based on sources believed to be reliable and acting in good faith, but no representation or warranty, express or implied, is made by any member of the BHF-BANK Group as to their accuracy, completeness or correctness. Opinions and recommendations are given in good faith but without legal responsibility and are subject to change without notice. The information does not constitute advice or personal recommendation, for which the duty of suitability would be owed, but may facilitate your own investment decision. Moreover, you should seek your own advice as to the suitability of an investment matter mentioned herein. Investors are reminded that the price of securities and the income from them can go down as well as up and that the past performance of an investment or a market is not necessarily indicative for future results. This document is for information purposes only. Descriptions of any company or companies or their securities mentioned herein are not intended to be complete, and this document is not, and should not be construed as, an offer to sell or solicitation of any offer to buy the securities mentioned in it. BHF-BANK Group and its officers and employees may have a long or short position or engage in transactions in any of the securities mentioned in this document, or in any related securities. This publication must not be distributed in the
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All rights reserved. Please mention source when quoting from it.

 

 

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