Euro Bulls Ignore OECD's Call For ECB Rate Cut, Will FOMC Rate Decision Add To Dollar

DailyFx · June 24, 2009, 7:00am

The Euro has started to trade lower after the OECD’s call for an ECB rate cut but the single currency has resumed its bullish momentum. The international economic organization has forecasted that growth will contract by 4.8% in 2009 and become flat in 2010 for the economic union.

[B]Talking Points
• Japanese Yen: Back Below 95.35
• Pound: Continues To Find Support Despite Growth Downgrade
• Euro: OECD Calls For Rate Cut
• US Dollar: Durable Goods FOMC Rate Decision On Tap

[/B][U][B]Euro Bulls Ignore OECD’s Call For ECB Rate Cut, Will FOMC Rate Decision Add To Dollar Weakness?[/B][/U]

The Euro has started to trade lower after the OECD’s call for an ECB rate cut but the single currency has resumed its bullish momentum. The international economic organization has forecasted that growth will contract by 4.8% in 2009 and become flat in 2010 for the economic union. Meanwhile, the Euro-Zone current account saw its deficit shrink from -7.0 to -5.9 billion as the tradable goods balance swung to a surplus. Also, crossing the wires was mixed Italian data with consumer confidence rising to an 18 month high of 105.4, while retail sales unexpectedly fell by 0.4%.

The Organization for Economic Cooperation and Development said that the central bank should lower rates toward zero and keep them there until the economy is revived. The OECD cited the expected disinflationary environment over the next two years as cause for the ECB to act now as “The euro area is in a deep recession, with external demand collapsing and domestic demand being weakened by tight financial conditions, rising unemployment and heightened uncertainty.” Yesterday nearly every member of the policy committee came out and stated that current rates are appropriate and with Nowotny saying they will remain unchanged until 2010. However, we have seen the central bank take a strong stance against lowering rates before only to reverse in the face of the obvious downside risks. Look for a break below the 20-Day SMA at 1.4020 for accelerated declines in the ERU/USD.

The Pound rose to as high as 1.6596 as European equity markets followed Asia’s lead with a strong open. The sterling began to trade heavy after the OECD report but has started to regain its footing and is looking to test the intra-day high. The U.K. economy’s growth forecast was downgraded to -4.3% from -3.7% as the country’s housing slump continues to be a weighing factor. The 6/3 high of 1.665 remains as formidable resistance and although we could see a test of the level, a sharp reversal remains a possibility. The 20-Day SMA which stands at 1.6335 continues to provide support as cable bulls refuse to give up the fight. A break below there would be a strong bearish signal with a potential test of 1.5801 the 6/8 low.

U.S. durable goods orders are expected to have fallen by 0.9% in May after a 1.7% improvement the month prior. It would be the second decline in the last two months and a sign that companies remain cautious despite signs of a recovery. The biggest obstacle for a rebound in growth may be the psychological impact on businesses and consumers as they may remain tepid for sometime. Therefore, considering that prospect we could see dovish comments from Fed Chairman Bernanke after today’s policy decision. The FOMC is expected to keep the Feds Fund rate at 0%-0.25% as downside risks remain for the economy. A dour outlook from the central bank could spark risk aversion and dollar support. Conversely, there are enough signs that a recovery is imminent with the rate of job losses slowing to 345K from 504K and improvements in manufacturing and housing. Thus, an upbeat Bernanke could raise optimism and add to dollar weakness.

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