Euro affected by increasing German unemployment

04-30-2009 15:24

The Euro reached a 1.3388 level before the German unemployment report proved another 58.000 job losses and resulted the unemployment rate to rise to 8.3%; the highest level since December 2007. Bearish sentiment increased by the unchanged CPI-estimate at 0.6% as a 0.7% rise in inflation was expected. Although unchanged prices weaken deflation concerns, markets were willing to take away these concerns if price pressures would continue to increase. For that reason, it is likely that the European Central Bank could initiate non-standard measures at their next policy meeting.

Possible rate cut by 0.25%, decision on quantitative easing efforts postponed

The May 7th decision of the ECB has resulted in mixed views and caused markets to believe that the members are not unanimous concerning the required measures. This situation could have been clarified by yesterday’s comments by Juergen Stark who said: “we will make a decision about additional non- standard measures, which we will implement when the lower interest-rate limit is reached”. Many believe that traditional measures should be exhausted first before implementing non-standard measures and that interest rate should not be lowered close to zero. For that reason it is likely that the central bank will lower rates by 0.25% next week and that they postpone the decision on quantitative easing until their next meeting as they evaluate previous attempts and proceed with their measured approach. As a result of this scenario the Euro could find support if the ECB indicates that their accommodative monetary policy exhausts. Nevertheless, the declining outlook for the EU economy may affect the Euro if markets believe that the ECB remains behind the curve.

GFK consumer confidence reading rises to record high

The British Pound has faced a downfall and dropped 100 pips after it reached a 1.4949 level, which is the highest level in two weeks. Selling stocks in order to cash in on a sharp rise could be possible due to the fact that the alert for the ‘swine flu’ has been raised to the second highest level and due to the looming Chrysler bankruptcy. The bullish case could be increased by positive fundamentals as the GFK consumer confidence reading went up to the highest level this year: -27. The Nationwide house price indicator dropped by 0.4%, which was less than the expected -1.2%, while last month resulted in a 0.9% decrease. Stabilization in the housing market will be a stimulating factor for the economic recession and could boost the Pound.

Chicago PMI reading expected to increase to 35.0

Optimism increases on improving personal consumption and on consumer confidence, consequently weakening the Dollar. Furthermore, the first jobless claims will probably be stable at 640.000 due to the labor market which remains damaged by the recession and could affect consumer spending. The Chicago PMI reading is expected to rise from 31.4 to 35.0, proving that activity is recovering as credit markets ease, which could have a positive impact on future job losses. This would stimulate the Federal Open Market Committee (FOMC) point of view that the deterioration of the economy is slowing down causing them to abstain from more quantitative easing measures.