Tuesday October 25, 2005 - 20:19:16 GMT
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Forex: Stronger German IFO and Weaker US Consumer Confidence Pushes EURUSD Higher
DailyFX Fundamentals 10-23-05
By Kathy Lien, Chief Strategist of www.fxcm.com
• FXCM SSI Signals Euro May Have Hit a Bottom
• Stronger German IFO and Weaker US Consumer Confidence Pushes EURUSD Higher
• Inflation Warning Bells Continue to Ring in UK and Europe
The dollar has taken another nosedive today following a dose of weaker economic data and some lingering pessimism stemming from yesterday’s announcement that Ben Bernanke will be the next Fed Chairman. After months of shoving reality aside, traders will now have to deal with the realization that Greenspan will not be with us forever. Judging from the write-ups in the press, it seems that the market still does not have its hands completely around Bernanke and his policies. Some are pointing to his past saying that he will be a big proponent against deflation while others are saying that he will not accept runaway inflation, especially since he has been a long-time advocate of inflation targeting. In our opinion, the market should be thankful that we avoided a possible surge in volatility which could have happened if President Bush picked a more unknown candidate. Yet it seems that the international market has not taken the news that the Fed Chairman has been picked by the current President all that well, even though we think he was probably the safest choice. Meanwhile consumer confidence in the month of October took another tumble to 85.0, which is the lowest reading in 2 years. The only glimmer of hope was the existing home sales report which remains unchanged in the month of September, suggesting that the Katrina impact was limited. The most important item that we want to mention and our traders have been waiting quite some time for is the flip in the FXCM Speculative Sentiment Index for the EURUSD. The ratio flipped from net long to net short, which is the first signal that we may have finally reached a real bottom in the EURUSD.
The Euro was lifted today thanks to some encouraging pieces of economic data. The biggest news of the day was the German IFO business climate survey – which saw sharp improvements in both the current sentiment and expectation components for the month of October. The survey is now at its highest level in five years even amidst the political confusion currently running through the country. These numbers affirm that the Euro-zone’s largest economy is indeed recovering more strongly and bolster expectations that the ECB will raise rates toward the beginning of 2006. Rate hike expectations were also supported by comments from ECB Weber who called for “great vigilance” with regards to price stability. Germany also released the preliminary consumer price index numbers for October. The index was expected to drop 0.1 percent from September but instead it rose by 0.1 percent. Annual inflation, expected to rise 2.3 percent, was actually up 2.4 percent. The final numbers for October are due in mid-November. Import price numbers in Germany rose in September as well, up 0.5 percent from August and 5.1 percent from a year earlier, considerably higher than expected. These figures, despite predictions otherwise, show that inflation is continuing to plague Europe and could put pressure on the ECB to raise rates as early as the first quarter of next year.
Like the Euro, broad dollar weakness has pushed the British pound higher as traders pound the dollar after reports of lower than expected US consumer confidence numbers and mounting speculation that the Bank of England will not cut rates for the rest of the year as inflation rises and the housing market begins to recover. Only one economic release was announced this morning from Britain. UK car production, seasonally adjusted, was shown to have risen in the three months leading into September by 5.6 percent after dropping a revised 1 percent in August. This rise was due to a sharp increase in demand for exports, making up for the decline in domestic demand. The recovery in auto production after hitting a low in June, could be signaling a slightly recovery in the British economy. As inflationary pressures mount, the Bank of England has its hands somewhat tied as far as lowering the interest rates to spur growth. In fact, in his testimony in front of to the House of Lords Economic Affairs Committee, BoE Governor King expressed his concerns about rising inflation. However, after dropping rates in August, there have been one or two sparkles of hope that the economy could be improving itself. If production figures continue to be released in the same result as the auto production, a recovery may be looming.
The Japanese yen strengthened against the dollar for the second consecutive day. Sales data was released mixed this morning. September supermarket sales dropped for the nineteenth straight month, falling 1.9 percent after falling 2.9 percent in August. The decline can be partially blamed on low sales of fall and winter items as summer heat lasted well into the first month of fall. However, nationwide department store sales rose for the first time in two months by 0.8 percent, after declining 0.7 percent in August. Rising wages and a booming economy is allowing Japanese consumers to shed some of their traditionally frugal spending habits, adding to domestic demand which the government is relying upon to compensate for waning exports. The Bank of Japan also released it quarterly survey from its regional bureaus this morning. Consistent with last week’s reports from the research divisions, these reports show that Japan’s economy is continuing to grow gradually, however improvement has been uneven across the country. The ministry of finance also warned about the increasing economic impact of high oil prices at a time when Japan is pushing to lessen its reliance on oil imports.
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