Pound and euro rise while manufacturing productivity decreases

03-10-2009 15:48

Stock markets seemed to recover after last week's risk aversion while during last night's trading the euro gained by more than 100bps. It looks like prices are stabilizing, which is proved by the increase in German consumer prices; the first one since July 2008. Still, the rest of the economic docket shows that the European recession is deteriorating. The German trade balance grew to 8.5 billion from 7.3 billion, which was a result of the fourth consecutive month of weakness, proved by the drop in exports by 4.4%. French manufacturing dropped in January by 4.1%, which resulted in an annualized decrease of 16.5%. This can be explained by a 15% fall in consumer goods.

Euro rises – More rate cuts possible, even to zero

In spite of the 'dovish' remarks by Lorenzo Bini Smaghi, member of the European Central Bank, and despite the poor fundamental data, the euro gained today while euro's strong association with risk appetite was important. In the German business paper, Boersen-Zeitung, Smaghi said that “If the (economic) situation worsens, the ECB is ready to reduce rates further, even to zero”. This could be a result of a growth in the deflationary pressure, according to Smaghi.

UK economy may deteriorate as British manufacturing activity dropped

British manufacturing production fell for the ninth consecutive month as activity dropped by 2.9% in January which resulted in an annualized rate of -12,8%, proving that UK's economy may show a worsening depression in the initial quarter of 2009. The global recession has erased the demand for raw materials while the demand for metals fell by 18%.

Risk of inflation – Fed Chairman’s comment

During last night's trading the dollar was affected by a slight increase in risk appetite. The risks of inflation will increase as goods increasingly grow scarce and dollars become abundance due to the financial injections by the government. To prevent record prices, it may be necessary that the central bank revises their recent easing policy. Today Fed Chairman will comment the bank regulation and if the markets don’t appreciate his comments, it could frustrate the stock markets and affect the dollar negatively. If the markets like the comments, the present bullish sentiment could erase some of the recent dollar gains.