» European Morning Update 25th April 2008

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European Morning Update 25th April 2008

Dollar sidelined in Asian trading while the market digests yesterday’s moves

Releases from Japan:

March                                                  Forecast   Actual
Nationwide CPI                           (YoY) +1.2%     +1.2%
Nationwide CPI ex food & energy (YoY)   +0.0%     +0.1%

April
Tokyo CPI (YoY) +0.5% +0.6%
Tokyo CPI ex food & energy (YoY) +0.1% +0.0%

Core inflation across Japan moved into positive territory for the first time in 10 years. However, at +0.1% it is hardly worthy of mention. However the real CPI rate at +1.2% is a more significant issue.

As the economy minister Ota commented, rising inflation that has not been generated by domestic demand and while wages remain stagnant is just not a healthy sign. The word stagflation is one that hangs heavy at the backs of officials’ minds as they see the export life blood of GDP slowly hemorrhaging to make one wonder whether the country could dip back into recession with inflation rising…

There is no difference in Japan in a higher percentage of household budgets having to be allotted to higher food and fuel prices and when wages are stagnant this will act as a dampener to domestic demand.

Some talk of higher interest rates as inflation rises and some talk of lower interest rates because of the decline in growth. Which is likely? Frankly neither.

The BOJ is wary of returning to a zero rate policy when it clearly provided no boost before. What benefit is there for businesses borrowing at 0.25% rather than 0.50% when consumers aren’t buying goods?

Higher interest rates are just not justifiable as they only control inflation when it is caused by strong demand. Don’t expect any change from the BOJ.

The following economic releases are due today:

Q1
U.K. GDP (QoQ) +0.4%
U.K. GDP (QoQ) +2.6%

March
German Import Price Index   (MoM)   +0.6%
German Import Price Index    (YoY)   +5.9%
Euro-zone M3                     (3MoY)   11.0%
Euro-zone M3                       (YoY)    10.6%

April
University of Michigan Confidence (F) 63.5

Well yesterday raises the chance that we’ve seen the Euro high for the year already. At least for now we can expect the Dollar to make further gains. The bigger question is whether these gains will be direct or whether there should be a pullback first.

I’ll stick my hand up for the correction first camp. Looking at the Euro as a base currency to look at the first move from its peak would normally trigger a move to the area of the last major corrective low. This was at 1.5510. If we see any loss of last night’s 1.5636 low it would not only imply a direct test of this level but then following a mild correction a move much lower – probably to around the 1.5340 low.

Thus I feel that since the 1.5510 area should produce a slightly larger pullback it should mean that today should see a correction back to the 1.5751-75 area and from there we should anticipate the decline to around 1.5510.

This seems to be back up by the Pound which just about held the 1.9690 support and does imply a fairly sizeable pullback. The Swissie is less clear, but ideally this too needs a pullback first also, possibly as far as 1.0161-00.

Thus don’t expect quite so much excitement as yesterday as we move into the weekend. Next week promises a little more movement again with the FOMC meeting on Wednesday and a rash of month-end economic releases to confirm or deny yesterday’s dent that was put into the European economy…

Note important support and resistance areas:

         USDJPY        EURUSD       USDCHF       GBPUSD
Res: 105.07-37    1.5775-00    1.0450-70    1.9866-77
Res: 104.59-72    1.5720-51    1.0383-09    1.9753-75

Spt: 103.70-90 1.5599-36 1.0271-05 1.9659-84
Spt: 103.45-70 1.5510-34 1.0190-13 1.9599-09