Friday December 17, 2004 - 22:07:47 GMT
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Forex: Euro Rallies On Improving German Business Sentiment
DailyFX Fundamentals 12-17-04
By Kathy Lien, Chief Strategist of www.dailyfx.com
·US Consumer Price Inflation Rises In November
·Euro Rallies On Improving German Business Sentiment
·BoJ Downgrades Assessment Of Economy For Second Consecutive Month
Range trading continued to be the theme in the euro as it bounces near the bottom of its recent 1.3180-1.3450 range. A stronger than expected German IFO survey of business confidence helped to boost optimism, especially since the market had forecasted sentiment to decline in December. Retreating oil prices and increasing domestic demand helped to offset the rising euro’s impact on falling exports. The disparity between German and French growth continues to grow. In Germany, improvements were seen in the latest retail sales, factory orders and industrial output reports. Meanwhile if you recall, France released some pretty disappointing data yesterday. In fact, recent weakness in the country’s industrial and manufacturing production dragged overall industrial production for the entire region lower. The market had forecast industrial production to increase 0.1% in the month of October, but instead it unexpectedly decreased 0.5%. In the week ahead, trading should begin to slow as we move closer to the holidays. The main question that we are getting from traders is whether we have seen a double top in the euro. At this point it is too early to tell. At bare minimum, we would need to see a break of Monday’s low.
Consumer price inflation in the US increased 0.2% m/m, right in line with expectations. The annualized pace increased to 2.2% from 2.0%, which brings us closer to neutral or positive real rates. The dollar reaction was muted despite the rise because the risk was to the upside and the report was tamer than initially feared. With headline producer prices increasing 0.5% in November and consumer prices rising 0.2% in the same month, producers are still bearing the brunt of the energy related appreciation in input costs. The lack of significant moves this week in the dollar reflects how much dollar bearish sentiment is entrenched in the markets. Next week is a shortened trading week, with no releases expected out on Friday and traders most likely leaving shortly after the release of Thursday’s economic data. Although leading indicators, Q3 GDP, durable goods, personal income / consumption and the University of Michigan consumer confidence survey are all on the table next week, the focus will be on position squaring and book closing as we go into the Christmas – New Years week, which is generally the quietest trading week of the year.
As in the euro, there was more consolidation in the British pound today. The biggest news to report was the Bank of England’s announcement that they are considering changing the way that they calculate the trade weighted sterling. They believe that their current calculations undervalues the sterling because the weighting does not reflect increased trading activity with China or India and is skewed too heavily to Europe. The new index will not only include a broader number of trade partners, but also service sector trade. The trade-weighted sterling is important because it is one of the key measures that the Bank of England looks at when it meets to discuss monetary policy every month. The revision has prompted some speculation that the BoE may ease monetary policy as a result. Within their Quarterly Bulletin, the Bank of England also expressed their view that the slowdown in the UK housing market thus far has not had a significant impact on consumers. Spending remains strong with retail sales increasing 0.6% in the month of November.
Unsurprisingly, the Bank of Japan left monetary policy unchanged. Slower growth and tame inflation provides them with no reason to alter their zero interest rate policy. The BoJ downgraded their assessment of the economy modestly, nodding to the recent deterioration by saying that “there seems to be somewhat weak movements…mainly in production.” At the news conference, Governor Fukui also said that, “the economy is beginning to pause amid inventory corrections at information technology and other firms." This is the second consecutive monthly downgrade. Back in November, they warned that the increases in imports and exports might be ending. The BoJ also said that companies are becoming increasingly pessimistic, as reflected in the weaker confidence reported by the quarterly Tankan report. Meanwhile, the appointment of Mizuno to the BoJ policy board will further shift the balance of power in favor of hawks.
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