Dollar Rally Rolls On as Eurozone Economy Shows More Signs of Weakness -? Will 1.5500

[DailyFx]

Talking Points

• Japanese Yen: 105.00 barrier taken out as dollar continues to rally
• Australian Dollar: PCE drops as costs rise
• Euro: German unemployment rises in a surprise
• Pound: Weak nationwide weighs, but pound maintains relative strength
• US Dollar: GDP on tap




Dollar Rally Rolls On as Eurozone Economy Shows More Signs of Weakness – Will 1.5500 Break?

A surprising increase in the German unemployment helped push EURUSD below the 1.5600 figure in early European trade as evidence of economic slowdown in the 15 member union continued to mount. German unemployment increased for the first time more than 2 years suggesting that the regions most important economy is starting to sputter and run out of gas.

German unemployment rose by 4K from an expected drop of -25K – a considerable difference that sent the euro tumbling below 1.5550 before bargain hunters scooped in. In addition to the weak employment numbers EZ consumer confidence also slipped to -15 from -12 expected. On the other hand, EZ Retail PMI showed a marked improvement jumping from 41.6 to 51.3 as warm weather and stronger euro drove consumption trends higher.

In short, the economic picture in Europe remains mixed as the economy continues to expand at a moderate pace but warning signs abound that high exchange rates and high energy costs may take a serious toll on growth in the 2nd half of 2008. At the very least the current state of the EZ economy shows that there is virtually no chance for an ECB rate hike into the later half of this year and as such dampens any euro rally going forward.

On the US side the greenback received a boost from comments by Federal Reserve Bank of Dallas President Richard Fisher that the Fed may consider a rate hike if US inflation expectations begin to mount. We seriously doubt that the present day Fed will risk the possibility of double digit unemployment rates a la Chairman Volcker of the 1980’s by actually tightening credit conditions in the midst of major wealth destruction for most US households. However, his statement simply added to this week’s dollar bullishness and helped to push euro lower.

The key event risk facing the market in North America is the 2nd revision of US Q1 GDP data. While the report is backward looking, an upward revision will help to make the argument for dollar bulls that US economy despite all the well known woes has managed to avoid recession for the time being. Today’s jobless claims may also play a role in FX trade. Last week’s better than expected numbers helped quell fears that unemployment for May will expand markedly, and if today’s data remains on trend, the case for a US slowdown rather than full blown recession will become stronger.

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