Friday July 9, 2004 - 20:00:24 GMT
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DailyFX Forex Fundamentals 07-09-04
DailyFX Forex Fundamentals 07-09-04
As mentioned in this morning’s US Open Market Points, the German trade data for the month of May highlights the European economy’s continual dependency on external demand. If demand can be sustained, then this could help to bolster domestic demand. However, the recent rally in the Euro could threaten the crux of what is currently supporting the country’s recovery. Germany itself is grappling with weak growth, lackluster consumer consumption and high unemployment. Further hurting the recovery was Germany’s decision this morning to cut unemployment benefits as a part of Chancellor Schroeder’s controversial Agenda 2010 economic reform package. This is the biggest change to the nation’s jobless benefits system in five decades. In the week ahead, the most important economic release that we are expecting from the Eurozone is inflation data. Rising inflation expectations and higher commodity prices is expected to keep inflation pressures elevated. The annualized rate of inflation hit a 2-year high in the month of May. Inflation is a primary concern for the European Central Bank – any further increases in inflation could build a stronger case for a rate hike.
With the lack of any significantly market moving events, higher oil and gold prices continue to exert downward pressure on the US dollar. The only economic release of note was wholesale inventories, which increased 1.2% in May. US companies continue to keep inventories plentiful to meet rising demand. In the week ahead, we have a fairly busy US economic calendar with a focus on inflation data and retail sales. The Fed has already initiated its tightening cycle. However, last week’s weaker payrolls report has made the market cautious of being too optimistic about aggressive Fed tightening. We know that the Fed is currently focusing on 2 parts of the economy – the labor market and inflation. Therefore, there is a wait and see approach with many Fed watchers. Greenspan is scheduled to speak on monetary policy on July 20th. Before that, the market will be looking to the inflation data for guidance on how proactive the Fed will be.
The UK trade deficit widened from a downwardly revised –GBP3.1Bln in April to –GBP3.4Bln in May. The widening was a result of an increase in imports and a decrease in exports. Next week, we are also focusing on inflation in the UK. Like the ECB, the BOE is a staunch inflation fighter. First up on Monday are the PPI and the ODPM UK house price reports. Tuesday we are expecting the CPI report. Oil prices eased in June, which could help to relieve inflationary pressures. However, house prices remain elevated, which highlights the persistence of the housing boom. Next week’s reports will give us insight on whether the BoE will be looking to raise rates again as early as August.
The yen advanced against major currencies in Asia Friday as the latest survey published in the national daily Asahi Shimbun showed Koizumi's Liberal Democratic Party running neck and neck with the main opposition Democratic Party of Japan. Overseas players sold the yen earlier this week after surveys suggested Japan's ruling party would fare poorly in Sunday's Upper House poll - a result that could put pressure on Prime Minister Koizumi to resign, threatening his agenda of fiscal and banking-sector reform. However, the latest survey, carried out Tuesday and Wednesday, showed LDP support in the proportional representation section of the election up four percentage points from a week earlier at 24%. DPJ support was up three points at 25%, with 29% of voters still undecided. Of the 121 seats up for grabs Sunday, 48 will be decided through an essentially party-based proportional representation vote. The remaining 73 seats will be contested by individual candidates in local constituencies. Meanwhile, on Monday, the Bank of Japan is expected to keep monetary policy unchanged with deflation remaining a persistent concern.
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