Euro Drops On More Weak Data, Dollar Hits New Highs
May 9, 7:00 AM: EUR/$..0.8823 $/JPY..121.88 GBP/$..1.4246 $/CHF..1.7441
Euro Drops On More Weak Data, Dollar Hits New Highs by Jes Black
No Key Data Today
The dollar added to its gains against the European majors today as pessimism about Eurozone and British growth prospects weighed on both the pound and euro. The greenback was able to keep the broadly weakened euro pinned near a fresh 2-1/2 week low of $0.8812, which sent the pound to a three-week low of $1.4235.
Weighing on the euro today was a larger-than-expected 3.7% fall in German industrial production after a small increase of 0.6% February. Markets had been prepared for a larger drop after a 4.4% decline in manufacturing orders surprised the markets on Monday and sent the euro tumbling from its perch above $0.89. Slowing growth and no interest rate relief from the European Central Bank is likely to weigh on the euro in the near term. Euro/dollar support is seen at 88.00 followed by $0.87.50. Resistance eyed at 88.50 and 89.00.
In a rare occurrence, central bank moons are aligned this week bringing both the European Central Bank and the Bank of England together on Thursday for a monetary policy meeting. While the ECB will most likely keep rates on hold again, the BoE's monetary policy committee is widely expected to ease rates by another 25 basis points, bringing the Repo rate to 5.25%. At its last meeting, the MPC pleased markets with a 25 basis point cut in light of slowing growth and low inflation. This week, almost all analysts believe there will at least be a quarter-point cut, however polls show a 20% chance of a larger half point cut. Although this is highly unlikely to happen, it raises the concern that this week's MPC meeting will disappoint markets, which will weigh on the pound.
After the last rate cut, sterling reacted favorably as it underpinned British growth prospects with no current risk to inflation. Sterling rose from a one-week high of $1.4250 to a high of $1.4380, then fell to profit taking before shooting to one-month high at $1.45. The BoE's decision to lower interest rates helped the pound but it was their apparent readiness cut rates again that pleased markets most. Sterling is currently trading near a three-week low around $1.4250. If history repeats itself tomorrow, the pound will most likely appreciate against the dollar in the aftermath of the MPC's rate cut and its temporary break from shadowing the euro/dollar. After a possible false break below $1.4240, GBP/USD could rise as high as $1.4380 before falling back in line with the movements in euro/dollar.
Dollar/yen rose to a day's high of 121.96 after falling by 1-1/2 yen following yesterday's weaker-than-expected US productivity report. Dollar/yen traded the European session steady around 121.60, up from yesterday's US close of 121.28 as markets enthusiasm for the new Prime Minister dwindled since his speech on Monday. Moreover, back-to-back falls in the Nikkei reflect investors' anxiety over yesterday's comments from Taku Yamasaki, the ruling party's Secretary-General, who said that the stock buying fund proposed in the emergency economic package would probably be delayed until September. This is a foreboding sign that reform will not come quickly in Japan and will put the Koizumi government under closer scrutiny. Therefore, the yen could stumble if previous reform-driven optimism wanes and the new Koizumi government ceases to encourage yen bulls.
Japanese Prime Minister Koizumi said on Wednesday he stood by his structural reform plans, pledging to revive a flagging economy without resorting to conventional Keynesian fiscal measures. Koizumi told parliament he was not backing down from his stance on curbing Japan's enormous government debt load and that the main objective of structural reforms is to build a simple and efficient government that is fit for the 21st century. However, despite Koizumi's call for tough economic reforms, the Japanese debt burden will remain a challenge to come. Moreover, unless substantial changes are made soon, a fiscal crisis could explode which could cause the Japanese to resort to old economic rescue measures, not reform.
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