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Friday, May 30, 2008

US Dollar Rally Extended As Growth, Rate Forecasts Lifted

Source: DailyFX.com

Conditions seem to be improving for the ailing US dollar. A strong showing from the economic docket, falling crude prices and a boost to interest rate expectations all helped to drive the greenback to its third consecutive rally today. Looking at the fundamental source of this dollar strength, the first quarter GDP revision took the lead. Though the change to the annualized figure from an initially reported 0.6 percent clip to 0.9 percent merely matched economists’ expectations, the rebound helped sideline fears of an impending recession. The breakdown of the growth report revealed the narrowing of the trade balance to a five-year low - thanks to record exports and curbed imports - marked the largest positive change to the headline reading. However, consumer spending was unchanged at 1.0 percent growth from the year before – the slowest pace of expansion since the 2001 recession. This statistic should act as a warning for traders not to be too optimistic on the outlook for the second half. Indeed, the past two quarters expansion was still the worst period of growth in five years and consumer spending is expected to drop much further as the housing recession deepens and employment trends recede. Looking beyond the economic calendar, the pickup in the growth number added to the hawkish outlook for the June FOMC rate decision that has already been padded by the heavy inflation concerns in the minute’s forecasts and recent Fed speak. Fed Fund futures suggest the market is pricing in a 98 percent chance that rates will be held in June and a 34 percent probability of a quarter point hike in September.

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