Euro Remains under Pressure Ahead of U.S. Durable Goods Report
Durable goods orders are forecasted to rise 1.4 percent in April, marking the fourth advancement in the previous five months, while economists expect new home sales to climb 3.4 percent, an indication that the U.S. recovery was gathering momentum before European woes fueled concern about global economic growth. The projected rise in durable goods follows a 1.2 percent contraction in March which was driven by a sixty seven percent retracement in civilian aircraft orders.
Indeed, the labor market increased in April by the most in four years, while the unemployment rate rose to 9.9 percent from 9.7 percent as previously discouraged workers re-entered the workforce amid an improved outlook in the employment sector. As the business climate and expectations among American businesses continue to improve in the midst of higher earnings, employers will be willingly too add job seekers onto their payrolls. In turn, employment will lead to increased spending, and further gains in durable goods. Nevertheless, investors should not rule out figures coming in less than expected as goods orders are sensitive to economic changes. Thus, recent concerns regarding European debt contagion and uncertainty regarding the recovery from the 2008-09 crisis may lead consumers to scale back on longer lasting goods. In addition, the Fed recently stated that "the economic recovery could eventually lose traction without a substantial pickup in job creation," and went onto add that inflation is likely to be subdued for some time due to significant slack and stable long-term inflation expectations.
However, despite if figures miss or surpass expectations, the broader fundamentals are likely to drive the U.S. dollar higher against the euro in the short term so long as risk aversion remains the dominant theme amid growing concerns in the European debt situation.
EUR/USD: Following up on my report from earlier this month (Euro Remains under Pressure Ahead of ECB Rate Decision), we were looking for the pair to test the Fibonacci projection at 1.2564, and it has since then slipped below that level to currently trade at 1.2404. Now, the pair looks poised for a short term bounce after the single currency has tumbled to levels that many market participants would consider oversold, while euro speculative shorts are at a record low. We will remain on the sideline until further developments arise.
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Written by Michael Wright, Currency Analyst
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