INTERNET MARKETING: Forex News

by Angelo Airaghi [Guest Analyst]

4/16/2007

The G7 meeting ended with no surprise in Washington this weekend, but with Euro approaching 2004 highs, the European Central Bank (ECB) is preparing a new rates rise in the next few months.

The Federal Reserve will probably cut rates in the second semester of 2007

Last week’s Federal Open Market Committee (FOMC) minutes was pretty much a photocopy of previous reports. In fact, the Federal Reserve remains concern about inflation treats, while it closely watches the slower growth of the economy in the United States. This apparent state of conflict will probably keep the Fed on hold for the first part of 2007, but a new rate cut in the second half the year could be expected. In the United States recent data confirms that price are steadily increasing, while the economy is moderating. In effect, inflation should remain an issue for some years to come for world economies, as commodity markets appear to only have performed the first leg up of the cyclical bull market that began with the turn from the old to the new century.

In March, both U.S. export and import prices, which account for 17% of all goods bought in the U.S, raised more than market forecast by targeting month over month 0.7% and 1.7% respectively. Excluding petroleum prices import’s increase was more tenuous (+0.3%). However, the persistent weakness of the U.S. dollar may inspire fears of further import price inflation in the future. The headline Producer Price Index (PPI) increased 1.0% month over month and 3.2% year over year, above forecasts of 0.7% and 3.0% respectively. It has been the fastest pace of growth since August 2006. The jump in the index mirrored higher energy (+3.6%) and food prices (+1.4%). It was the second month of consistent gains in these components. Core PPI, on the other hand, rose 1.7% in March from a year earlier, versus a market consensus of 1.8% (February rate). Finally, the University of Michigan's preliminary index of sentiment decreased to an eight-month low of 85.3 in April from 88.4 in March. Expectations were for a decline to 87.50. Consumers surveyed expected an inflation rate of 3.3 percent in one year, versus last month's forecast of 3.0 percent. The expectations index, viewed by some analysts as an indicator of future spending, declined to 74.3, the lowest since August, from 78.7 in March.

As the negative dollar’s momentum unfolds, positive economic numbers are quickly digested by the market. In February, as an example, the U.S. international trade deficit surprisely narrowed to $58.44 billion from $58.88 billion dollars in January. Expectations were for a widening in the deficit to $60 billion. It was the result of a pull-back in both exports and imports. Exports declined 2.2%, after increasing 1.2% in January. Imports dropped 1.8%, after the 0.6% decline the previous month. The deficit with China, which accounts for 32% of U.S. trade deficit, decreased 13% to $18.43 billion. In January, it moved to $21.27 billion. Exports jumped 6.1%, while imports from China tumbled 10.0%. Net trade could provide only a marginal contribution to economic growth in the first quarter. In fact, last week data might anticipate another decline in imports and a moderate export increase. Jobless claims, on the other hand, jumped to the highest level since February’s 356,000 units. They rose 19,000 units to 342,000 in the week ended April 7th. This time, no special weather factors appear to have played a role in the broad base increase. The four-week average increased to 323,250, up 7000, consistent with a possible moderation in the labor market. The overall picture remains nevertheless positive, considering that the unemployment rate is down to a six-year low of 4.4%.

The European Central Bank intervention is only delayed

With no surprise, the European Central Bank (ECB) left rates unchanged at 3.75%. At the press conference, Mr. Trichet did not repeat the word "vigilance" regarding the bank's position on inflation surveillance. Nonetheless, he made clear that the ECB will "very closely monitor" prices developments and will act in a "firm and timely manner". President Trichet said he would not alter expectations that policy makers will raise their benchmark interest rate in June. Thus confirming a possible interest rates rise in the coming months, if the European economy and inflation rate will continue to grow with the same intensity shown in the first months of 2007. Economic data continues to support this hypothesis. In February, Eurozone Industrial Production rose to 0.6% month over month and to 4.1% year over year.

Euro is approaching 2004 highs

The trend remains strongly up for the European currency. Its price has overcome key technical levels at 1.3490 and can now target 1.3580, 1.3620, eventually 1.37. The next time/resistance area could be set at around April 20th, but only a decline below 1.3340 will target 1.32, 1.3150.

Angelo Airaghi is a Commodity Trading Advisor, registered with the National Futures Association and the Commodity Futures Trading Commission. He has been an active professional since 1990 working for major international financial companies. In the past 10 years, Angelo Airaghi has been an analyst and commentator for national and international media.