Euro/Usd is at Key Resistance Levels again

As the Euro is again targeting key resistance levels against the U.S. dollar, inflation in the United States appears to be manifesting the same cyclical path shown during past recessionary periods. Europe, in the mean time, awaits the European Central Bank (ECB) meeting of next week.

Inflation is always inflation

Inflation picked up again in the United States, supported by energy and food prices. In January, the Consumer Price Index (CPI) rose 0.4% (+0.3% expected) month over month, matching December numbers and it increased 4.3% on an annual basis. Core inflation rose 0.3% month over month and is now 2.5% versus December's 2.4%. The economic slowdown might be beneficial over the medium term, as a contraction of consumer spending could temper the increase in core consumer prices. In fact, in the past, inflation had usually followed the business cycle. During the recession of 2001, core inflation increased to almost 3.00% and fell near 2.0% during the first year of the recovery. In 1990/1991, core inflation moved up above 5.0% to then decline slightly below 4.0% in the first year of recovery.

Despite inflations aggressively pushing higher, the Federal Reserve will remain focus on the economic slowdown and should cut rates again in the first part of 2008. The labor market is under pressure with stocks still struggling and housing declining. In January, the Federal Reserve Bank of Philadelphia's index, which tracks the manufacturing activity in the Philadelphia region, slid to -24 from -20.9, the lowest level of the past seven years. In reality, for the first time in many months, housing starts doubled expectations and increased 0.8% in January. The multiple components rose 22.3% while single houses fell 5.2%. However, the situation remains critical with inventory at a highest level and permits declining 3% on the top of December's fall of 7.1%. In fact, during the week ending February 15h, the Mortgage Bankers Association's (MBA) mortgage application index, which surveys the mortgage lending trends among various financial institutions, slumped almost 23%.

Awaiting ECB meeting

Like elsewhere, inflations stays a constant menace to the European's economy and will make it difficult for the European Central Bank (ECB) to cut rates in the nearest future. In January, the German Producer Price Index (PPI) for goods was 3.3% (2.8% expected), much higher than December's 2.5%. Excluding the volatile energy sector, prices were up 2.5% year over year. ECB cut its economic growth forecast to 1.8% this year, while it increased inflation prospective to 2.6%. Unit labor costs are probably the greatest cause of inflation and workers in Germany are already demanding higher pay to balance the increase of commodity prices. As an example, IG Metall, the largest labor union in Germany, won a 5.2% wage increase last week to March 2009. Nonetheless, as growth is softening globally, cutting rates could become a reality over the medium term. For now, however, the European economy still gives signs of vitality. In fact, after falling 2.5 points to 50.6 month over month in January, the Eurozone PMI for the services sector flash estimate increased to 52.3 in February. At the contrary, the PMI manufacturing was practically unchanged at 52.3 from 52.8 in January. Spending has remained overall strong, while exports remained overall supportive. Nevertheless, capital flows appear to be tempering its support to the Euro. In December, the current account registered a deficit of Euro 10.3 billion, as direct investments showed another important decline.

Eur/Usd is again at key resistance levels

EUR/USD reached again the key resistance at 1.4850/1.4950. It is at the conjunction of various long term trendlines and the higher Bollinger band. It should be overcome with decision for higher prices. A swing above 1.5070 would reinvigorate the long term bullish trend and lift the European currency to 1.5150, 1.53. A move below 1.4350 could instead quickly target 1.4300, eventually, 1.41/1.38, if 1.4260 is overcome.

GBP/USD is consolidating between the support at 1.93/1.94 and the resistance at 1.98/1.99. They are both at the conjunction of various support/resistance lines putting the short term trend in a more neutral stance. A breakout above 1.9950 could lift the British Pound to 2.0010/2.0150. A decline below 1.9260 would instead let the British Pound to slip to 1.9210/1.9150.

USD/JPY is dancing at the important support area at 105.00/104.70, where various trendlines and the lower Bollinger band meet. It must be overcome with decision for lower prices. A move below 104.40 could target 103.80, 103.0. A breakout failure could take the U.S. dollar into higher levels, considering the large divergence between the Rsi indicator and the pattern on the daily and weekly charts. The resistance line at 109.00 is on target. A move above 109.80 is nevertheless requested for 110.60, eventually 111.50.

Angelo Airaghi
MG Financial Group

Posted in: Forex