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Euro Finds Support on Rising Producer Prices and Stronger Services.

By John Rivera, Currency Analyst
06 May 2008 09:30 GMT

Eurozone producer prices rose 0.7% in March helping erase losses from the Asian session, as energy costs rose to 1.8% from 1.1% the month prior. Factory gate prices in the region rose to 5.7% from 5.4% on an annualized basis, as record food and energy costs weigh on producers. Meanwhile, the service PMI rose to 52.0 from initial estimates of 51.8 as hiring increased in the sector. Rising prices and a resilient economy will keep the ECB on hold for the near future. The central bank is expected to keep rates unchanged at Thursday rate decision, especially after President Trichet warned of global inflation risks at the G-10 meeting on Monday.

U.K. PMI services fell sharply in April to 50.4 from 52.1 the month prior, sinking the Pound over 50 bps. The industry saw its margins squeezed as prices charged fell while input costs rose. This will put pressure on the BoE, which is expected to keep rates unchanged at Thursday meeting, as the sector accounts for 75% of the economy. The consensus is that the next policy meeting will be close with a 5-4 advantage to keep rates unchanged, making a rate cut at the June meeting very likely, which may see the Pound break from its current trading range of 1.9600-2.000.

The RBA left their benchmark interest unchanged at a 12 year high of 7.25%, as domestic growth continues to slow. A balance statement followed from Governor Stevens, acknowledging that even though they expect demand to slow and reign in inflation, the risk exists that growth will continue and rising prices will again become a focus of the central bank. The statement weighed on the AUD/USD which had been receiving support from a reduction in the trade balance on higher than expected exports. Increases in coal, iron and wheat exports saw the deficit shrink to -2736 from -3261.

The U.S. Calendar is light with only ABDC consumer confidence, which is typically a non-market mover. However, Chairman Ben Bernanke’s recent plea to the government and mortgage lenders to take further actions to prevent more foreclosures may reduce speculation that the Fed will pause at its next rate decision.

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05-6-08

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06 May 2008 09:30 GMT