Euro Choppy Despite Trade Balance Deficit Shrinking, Pound Higher After Rise in Home

DailyFx · May 18, 2009, 9:20am

The Euro remained choppy after the Euro-zone trade balance showed a surplus in its headline reading of 0.4B with the lowest shortfall in a year on a seasonally adjusted basis at -2.1B.

[B]Talking Points
• Japanese Yen: Consumer Sentiment Improves
• Pound: Rising Home Prices Providing Support
• Euro: Trade Balance Shows Continued Weakness
• US Dollar: Housing Data on Tap

[/B][U][B]Euro Choppy Despite Trade Balance Deficit Shrinking, Pound Higher After Rise in Home Prices[/B][/U]

The Euro remained choppy after the Euro-zone trade balance showed a surplus in its headline reading of 0.4B with the lowest shortfall in a year on a seasonally adjusted basis at -2.1B. Although the region saw a pick up in overall exports, shipments to the U.S. and U.K. –its main trading partners – declined by at least 25%. A drop in demand for energy products slowed which helped mask declines in machinery, vehicle and manufactured goods. The Euro/dollar has traded in the 1.3425-1.3475range after a failed attempt to break below the 20-Day SMA at 1.3423.

The region’s economy continues to experience weakness which has forces the ECB into a more accommodative monetary policy. It remains to be seen of the central bank can end its bickering and set on a unified plan for future policy. CB council member Ewald Nowotny expects downward revision to growth forecast with June projections, but at the same time sees signs for the economy to bottom out. These comments followed last week’s remarks that decision makers haven’t discussed any more measures beyond the announced covered bond purchases. We may be seeing the central bank trying to temper expectations for expansion of the purchases program and further rate cuts. If we start to see more rhetoric along these lines it could provide support for the Euro.

The pound has steadily gained in early European trading as optimism is beginning to improve aided by an improvement in the housing sector. The Rightmove house price index rose by 2.4% which was the most in a year as easing lending standards have boosted demand. Indeed, the quantitative easing measures by the BoE are helping to drive down borrowing costs and make credit available. We could see optimism continue to build with retail sales expected to have risen by 0.5% in April. CPI and the BoE minutes may threaten bullish sentiment, but following the quarterly inflation report they both will not provide any new surprises. The central bank has forecasted that prices will remain below their 2% target into 2012 and that was the impetus for then expanding their quantitative easing efforts at their last policy meeting.

The dollar was mixed overnight as it saw gains against the Yen and Euro but declined verses the pound and commodity currencies. Equity markets have started to find support in Europe and U.S. futures are pointing toward a higher open as optimism has started to build. Indeed, with positive signs that the current downturn is slowing in Japan and the U.K. it will add to the improving global picture which weigh on the dollar today. The NAHB housing market index is the only scheduled fundamental release and the second tier indicator may not have a major impact on price action. However, the expected improvement to 16 from 14 combined with tomorrow’s anticipated improvement in housing starts will provide further evidence that the sector is bottoming. The TED spread narrowing to its smallest level since before the credit crisis began is a clear sign that credit markets are thawing. Therefore, we could see the outlook for domestic growth improve and in turn see the dollar slump as safe-haven flows search for higher yielding assets.

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