Euro, Pound Sunk by Dimming Outlook For A Recovery and Heightened Geopolitical Risks

The Euro has steadily declined during post holiday trading as weak fundamental data and increasing risk aversion and the North Korean Nuclear test have combined to dragged the EUR/USD below the 5/22 low of 1.3888.

[B][U]Talking Points[/U][/B]

· [B]Japanese Yen: Supported By Political Fears[/B]

· [B]Pound: BoE’ Sentence Says Too Early For “Green Shoots”[/B]

· [B]Euro: German GDP Contracts By Most On Record[/B]

· [B]US Dollar[/B][B]: Housing, Manufacturing and Sentiment Data on Tap.[/B]

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[U]Euro, Pound Sunk by Dimming Outlook For A Recovery and Heightened Geopolitical Risks On North Korea Actions[/U]

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The Euro has steadily declined during post holiday trading as weak fundamental data and increasing risk aversion and the North Korean Nuclear test have combined to dragged the EUR/USD below the 5/22 low of 1.3888. Indeed, the final German GDP reading remained unchanged at -6.1% as the country experienced its deepest quarterly contraction on record. A drop in exports which fell 9.7% was the main driver of the economic downturn as global demand continues to be impacted by the credit crunch. However, the decline was revised higher from initial estimates of -11.7% which combined with the unexpected 0.5% increase in private consumption provides some hope that the economy is stabilizing. Meanwhile, industrial new orders in March unexpectedly fell -0.8% against expectations for a 0.8% gain.

The decline in activity in the Euro-zone ends the trend of improving data for the region and could be a sign that any form of growth could be a ways off for the region. In Germany, the region’s largest economy, a steeper than expected 7.9% decline in capital investment will make it difficult for the country to realize any short-term domestic growth and considering the dearth of global demand we could see the current recession prolonged. Indeed, there has been some talk that the German government may be looking at a third stimulus package despite Chancellor Merkel insisting in that enough has been done to end the recession. The appears that it will remain under pressure which could lead to a test of support at 1.3810the 38.2% Fibo level of the 1.3422-1.4050 advance.

The pound has also been under pressure as it has felt the impact of declining confidence in a global recovery and the increased geopolitical risks. Indeed, North Korea is reported to have launched two more missiles following yesterday’s initial nuclear test which has been met with outrage by global leaders. Remarks from BoE member Andrew Sentence that it is too early to look for signs of growth has also added to the pound bearish sentiment. The committee member said that "We have to get to a point where the economy stops contracting before it begins to recover."The GBPO/UD would reach as low as 1.5777 before finding some brief support. The 5/22 low of 1.5756 could slow its momentum but a retrace back to the 200-Day SMA at 1.5535 is a strong possibility.

The dollar has been supported throughout the overnight session on the heightened geopolitical risks and a declining outlook for a global recovery. The economic docket may not have a top tier release on tap, but the combination of housing, manufacturing and sentiment data could impact price action if they combine to tell the same story. The S&P/Case Schiller indicator for home prices un the top 20 U.S. cities is expected to show that the rate of decline for values continues to slow from -18.63% to -18.40%. A stabilizing housing market combined with the expected improvement in consumer confidence from 39.2 to 42.6 and a pick up in manufacturing activity in the Richmond and Dallas regions should raise the outlook for a U.S. economic recovery. Therefore, we could see the dollar start to lose ground as risk appetite remains strong. However, be aware the closer that we get to a rebound in growth we should start to see the greenback’s correlation to risk dwindle.

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[/B]Forex Trading Weekly Forecast - 05.25.09

[I]To discuss this report contact John Rivera Currency Analyst: [/I][I][email protected][/I]</p>