US Recession Fears Increase

There will be a further increase in US recession fears, but the Euro will struggle to secure any great advantage.

The dollar was unable to make any headway on Friday and weakened to test levels around 1.47 in New York. The US growth indicators were significantly weaker than expected with the New York manufacturing index falling sharply to -11.7 in February from 9.0, the weakest since 2005, and maintained the recent pattern of particularly weak manufacturing-sector surveys.

There was also a further sharp decline in the University of Michigan consumer confidence index to 69.6 in February from 78.4 the previous month which was a 15-year low for the index. The continuing erosion of confidence, despite a sharp drop in interest rates over the past month, will reinforce fears over the US economy, especially as a reading of this level usually signals a recession. Elsewhere, there was a 0.1% increase in industrial production for January.

The weak data will maintain pressure for the Federal Reserve to sanction further cuts in interest rates which will reinforce the lack of yield support for the US currency with markets pricing in further rate cuts. Dollar confidence will also tend to weaken if there is further evidence that Fed action is not having a significant beneficial impact, but this is liable to be offset by defensive US currency demand.

Investica

Posted in: Forex