Euro suffered from inflation data and US increase in Citigroup ahead

02-27-2009 15:25

The European currency fell over 100 bps to 1.2635 as a result of the Euro-Zone inflation data. Consumer prices in the region dropped further against the ECB’s 2% target, from 1.6% to 1.1%, due to lower energy costs. This could justify another rate cut by the central bank. Companies continue to lower costs which causes unemployment in the region to increase by 8.2%, while concerns that the recession is worsening increase.

Bank of England continues easing policy

The sterling dropped over 150 bps before reaching a 1.4150 level while Lloyds Banking Group Plc announced that it had not come to an agreement with the administration concerning the asset insurance program. Consumer confidence showed a minor improvement from -39 to -35, while the economic climate component reported a record low.
Brittan’s outlook remains gloomy and more negative banking data will deteriorate prospects. It is expected that at the March 5th meeting the Bank of England will lower rate by 50 bps and quantitative easing is likely to start soon. Governor King confirmed the need to improve the money supply that has slowed further despite the rigorous easing policy by the central bank.

Initial US GDP may fall by 7.3%

Risk aversion remains dominate as concerns among traders raised due to the US government actions. The government has asked Citigroup to generate private capital and to modify their board of directors in order to increase government’s stake up to 40%.
The second reading concerning the US 2008 fourth quarter gross domestic product data is expected to see a revised lower by 1.6% to -5.4%. Also durable goods orders resulted in a revised lower to -4.6% from -3.0% which may cause the initial GDP print to show a -7.3% fall. This could result in a decrease of the personal consumption component which may exceed economists’ expectations by more than -3.7%. Deterioration in the last quarter of 2008 will affect expectations for future growth negatively and could raise concerns for more unemployment and lend further Greenback support.