US and EU Quarterly Macro Overview; Euro at Significant Long-Term Technical Resistance
Headlines in financial news have increasingly started using terms like “expansion” where before positive data was described as evidence of economic “recovery.” Whether or not this optimistic view is an accurate description of the current climate remains to be seen. Currently, expectations for global growth in the 2nd quarter are still expected to show strength and contribute to a healthy rise in yearly terms with a rise of 4.2% in overall global growth.
In the U.S. economy, one of the main questions to consider is whether or not the American consumer will be able to de-leverage (decrease liabilities) and increase retail spending and make a solid contribution to total GDP for the year. As long as incomes and net worth outpace liabilities, this is a realistic possibility and with the narrowing US trade deficit in recent months, US corporations might surprise to the upside next earnings season.
In 2010, one of the most important factors in growth was seen in the manufacturing sector, where inventories were restocked, showing an improvement in sales capability. Expectations for the manufacturing sector in 2011 are less optimistic, so the key issue for the remainder of the year will be whether or not the American consumer will make up for the projected difference.
Many analysts were forced to revise their predictions for the yearly US unemployment after data showed jobless numbers dropping from 9.8% in November to 8.9% two months later. A movement this large lends an additional argument to the possibility of strong consumer sales for the 2nd quarter. Current market expectations for Non Farm Payrolls are calling for monthly rises of 150,000 jobs during the second quarter.
On a trend basis, recent months have shown that CPI has been rising in the major economies and this is creating some level of worry that these numbers could become unmanageable. Only a few of these countries, however, have actually tightened lending conditions, which shows that growth-oriented strategies are being pursued. Though, the Eurozone was a recent exception to this and it will be interesting to note the effects this could have on the sovereign debt story that is focused on some members of the EU.
Several of these countries are still dealing with recessionary conditions so the major question going forward will be whether or not Germany can remain the driving growth engine for the EU economy as a whole in Q2. The strain is already starting to show as high levels of private debt, unemployment still above historical averages, tepid wage growth, and decreases in trade surpluses are being factored into the equation.
Market forecasts in yearly GDP are calling for a rise of 1.5%. Growth is also forecasted to slow as the year progresses as the ECB has signaled additional rate hikes during recent press conferences. The sovereign debt situation has still not seen a solid resolution, so until this occurs, downside risks remain to these yearly GDP growth forecasts.
The EUR/USD has reached a confluence of long term trend, historical, Fibonacci, and moving average resistance as prices run into the (also psychologically significant) 1.45 level. Pulling out to the weekly chart, we can see that prices have already broken and closed above the massive downtrend line from the 2008 highs above 1.60. This in itself is a highly bullish signal but if prices can close above their weekly 61.8 Fib retracement of the move from 1.6035 to the 2010 lows at 1.1870 (which comes in just below 1.45), the longer term view calls for much higher levels after the pair consolidates to work off its overbought weekly indicator levels (currently just below 70). Additional resistance comes in at the historical 1.4580 level, so these are the key levels to watch during the next two weeks. Short term sellers can buy Dollars here at an “on sale” price but the longer term view here appears to be changing, with the critical juncture occurring at current levels.