Forex Trader Top 3: USD vs. Euro- The Inflation and Currency Matchup
Mark Whistler is the founder of www.WallStreetRockStar.com and is the author of multiple books on trading. Mark’s newest book, The Swing Trader’s Bible – co-authored with CNBC/Fox News regular guest Matt McCall – will be on shelves in late summer, 2008. In addition, Mark also writes regularly for TraderDaily.com and Investopedia.com.
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1. Euro Zone Inflation through the Roof at 3.6%
The News:
Euro Zone CPI prices for March increased 3.6% year over year, or 1.6% above the ECB’s key inflation target.
The Breakdown
The ECB is in an “economic pickle” right now with inflation far above the 2.0% comfort level. What’s more, the global subprime issue is still threatening to slow growth in the Euro Zone, especially if the present UK credit squeeze jumps the pond.
The ECB is likely looking at core inflation (2.0% in March, over 1.8% in February) as some justification for it’s “no hike now” stance. Overall core inflation has yet to enter dangerous territory, however, energy, food, alcohol and housing have.
The euro blistering strength over the past six years has now pushed the currency to highs against many other countries. Tourism could be a huge trouble spot this summer, as many choose to stay out of Europe, based on exchange rate concerns alone. Who really wants to pay $8 to $10 for a beer and $12 to $16 for a hamburger?
The IMF has recommended that if the ECB can’t (won’t) cut rates, it should think about lowering borrowing costs to ensure liquidity remains. However, the ECB remains hawkish, assuming that the strong euro will bulldoze any economic pullback.
The Bottom Line:
The ECB has backed itself into a corner; and now its hands are tied. The ECB should have taken action six months ago, but then again, so should have the U.S. two years ago. Regardless, it’s likely that the ECB is simply ‘hoping’ inflation in 2008 is frontloaded and will ease in the latter half of the year, giving it room to cut rates slightly.
Finally, global advanced economy GDP growth will remain low, while inflation and commodity prices will remain high, until the world (including the U.S.) reviews protectionist trade policies loaded with tariffs that are artificially propping up grain prices.
2. U.S. Inflation Under Control at the Present Moment
The News
On Wednesday, U.S. CPI came in at 0.3% in March, over February, or 4.0% over the same month last year.
The Breakdown
Consumer Prices within the index (despite elevated agriculture and energy prices) have abated some from the fearful levels seen from October 2007 to January this year. Most of the reasoning behind why prices seems to be easing is that of slowing economic growth within the U.S. and less spending overall.
According to the release prices for food and beverages were up 5.1% for the first quarter, year over year. What’s more, energy has increased 8.6% in the same period. Combining yesterday’s PPI report with Wednesday’s CPI, we see that though prices (especially in food and energy) are elevated – virtually across the board – manufactures are shouldering most of the burden. This is a good occurrence, given that with the national average for gas at $3.44 for the week of April 14, consumers are most likely tapped out in the present environment.
Tax rebate checks begin to flow in about two weeks, which will help ease some economic tension within the U.S., though it is fair to say that America certainly is not out of the woods yet.
The IMF recently lowered U.S. GDP growth expectations to 0.5%, far below the 2.0% to 2.5% most economists agree is healthy for advanced economies. What the aforementioned means is that we must keep in mind that even when good news surfaces, the overall situation within the U.S. is one of the “hard times.”
The Bottom Line
Wednesday’s CPI report means that the FOMC has room for another rate cut in June. Inflation is somewhat in check, which is a huge help in the current economic downturn, especially considering the rally in commodities lately.
3. Forex Force Subscribers Knew about the Overnight EUR/USD Move Before it Happened
The News:
On Tuesday, Forex Force recommended subscribers buy the EUR/USD at 1.5780, or better, looking for new highs and potential capitulation to ensue on Wednesday. Was there inside information?
The Breakdown
There was no “inside information” whatsoever. Common sense indicated Euro Zone inflation is a killer now, and would come in at 3.5%, or higher on Wednesday. Then, on Wednesday morning, Euro Zone CPI prices showed a 3.6% increase year over year, or 1.6% above the ECB’s key inflation target. Hawkish comments coming from the ECB indicate that the central bank clearly has its hands tied and is in trouble regarding inflation. The bank should have acted sooner to starve off this situation.
Forex Force subscribers were informed on Tuesday, “In my opinion, the machismo coming from the ECB is nothing short of insane and eventually, Europe is going to get hit hard. Like bravado hardly fades from a drunken cowboy, it’s going to take an economic knuckle-sandwich for the ECB to change their current ‘we’re not cutting interest rates’ stance, which at the end of the day, supports a strong euro.”
The Bottom Line:
Forex traders are in for bumpy ride with the present state of troublesome economic affairs – not only in Europe – but globally as well. Those who are not trading with a solid plan in place will likely see accounts dwindle, as choppy trading ensues.