The U.S. dollar is at key technical levels

Source: Forexnews.com

The economy in the United States stays vulnerable, mostly supported by the international trade. Consolidation, rather than growth, could the be scenario of the next months/years, as the global credit bubble is fading away. The U.S. dollar, in the mean time, reached an important short term top against major currencies.

Consumes to decline further in the U.S.
Lower employment, housing declines and high oil prices might be stronger than the coming fiscal stimulus. Americans are pessimistic about the present and future state of the economy, while inflation is expected to pick up substantially in the coming months. Consequently, consumes should retreat further, although the fiscal package might give a brief boost to sells over the Summer.

The preliminary report of the Reuters/University of Michigan consumer sentiment index slumped 3.1 points to 59.5 (-1.5 expected), the worst numbers in almost thirty years. Retail sales declined 0.2% in April from March’s increase of 0.2%. Consumption has been almost flat so far with motor vehicles and parts showing the largest losses. Excluding the autos component, retail sales moved up 0.5% (+0.2% expected).

In reality, latest housing data was better than expected, but results should be observed over a larger period of time, since starts are down almost 30% compared to one year ago. In April, housing starts jumped 8.2%, the strongest move in more than two years, while permits increased 4.9%. Starts were supported by the construction of multi-family homes, as single-family houses declined to the lowest level in seventeen years.

Manufacturing production fading locally
A weak domestic market is subduing manufacturing production in the United States. In April, industrial production slid 0.7% (-0.3% expected). Capacity utilization declined to the lowest level of the past three years at 79.7%. Manufacturing production is very weak locally and moved down 0.8%, after remaining flat in March and falling 0.7% in February. Motor vehicles and part production slumped more than 8.0%. Finally, business equipment production, an indicator of capital spending, decreased 1.1% versus March’s up move of 0.7%.

Despite the economy clearly moderating, the Federal Reserve should implement a “wait and watch” approach supported by milder inflation data. Starting in June or the subsequent meeting will depend on the coming economic numbers. In April, the Consumer Price Index (CPI) rose only 0.2% month over month and declined 3.9% from 4.% on an annual basis. The core index fell instead to 2.3% from 2.4%.

A strong GDP in Europe. Will it last?
As more current data is producing weaker numbers in Europe, growth has been quite good during the first three months of the year. In the first quarter of 2008, the Euro zone Gross Domestic Product (GDP) showed a 0.7% growth month on month (+0.5% expected), above the previous 0.4%, and 2.2% year on year. Euro zone industrial production declined instead 0.2% month on month (-0.1% expected) in March, versus February’s +0.3%, and is now 2.0% year on year (+2.4% expected).

German and France have been two important assets to the European economy. In fact, in the first quarter of this year, the economy grew 1.5% (+0.7% expected) in Germany compared the 0.3% registered in the last quarter of 2007. Annually, it has been 2.6% (+1.7% expected). In France, growth has been 0.6% month on month (+0.4% expected) and 2.2% year on year (+1.9% expected).

Inflation is ECB’s main target
Economic expansion is expected to decline in the second part of 2008, since many emerging markets should surrender to the global slowdown. However, the European Central Bank (ECB) will not change its policy for now, although inflation receded a bit lately. In fact, Euro zone inflation stays strong at 3.0%, but core inflation declined to 1.6%, the lowest level of the past two years.

In April, German Consumer Price Index (CPI) declined 0.2% month on month, after increasing 0.3% in March, and is 2.4% annually versus 3.1%. German inflation represents almost 30% of the total monetary union inflation rate. In France, the Consumer Price Index (CPI) rose 0.3% in April on the top of March’s 0.8%. Annually, CPI is now 3.0% from 3.2%.

USD/JPY targeting support again

EUR/USD found an important support on the lower Bollinger band at 1.53. The short term trend is neutral. A move above 1.5690 would lift the European currency to 1.5780, 1.5850. A decline below 1.5170 would instead target 1.5050.

GBP/USD rebounded from the important support a 1.9400/1.9500. The next target could eventually be 1.9650, eventually 1.9750. Only a move below 1.9320 would eventually target 1.9250, 1.9160.

USD/JPY continues to consolidate between 106 and 102. The market appears to be targeting again 103.00/102.60. A move below 101.40 could eventually let prices to slip to 100.40, 100.00. A move above 106.30 would instead lift the USD to 107.00.