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Unemployment Soars, But the Markets Roar.
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Since the beginning of March the U.S stock indices have soared higher, retracing approximately 25% of their losses. Even though sentiment has flip-sided over the last week or so, economic data is still showing mixed signals, discouraging investors from returning their capital back into the markets.
Last week’s trading sessions were packed with data and events, including the G20 meeting. This time round economic leaders took an astonishing step in boosting confidence, stating that they are going to provide the world with a $1 trillion, in extra stimulus. One of the major problems of the current crisis is the lack of confidence that drove the markets into “panic” mode. In addition to the funds, the leaders pledged to restore growth and jobs, while tightening regulations of the financial system.
Wednesday and Friday’s data only emphasized the severity of the current crisis, as employment data showed that the U.S economy could be heading into a deeper recession. Wednesday’s initial jobless claims in the U.S jumped to a high of 669k, while Friday’s NFP result showed an -663,000k, pushing the total number of jobs lost since the recession began to 5.1 million.
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When observing today’s unemployment rates compared to the beginning of 2008, one can see that the problems in the subprime has had a rippling effect on the global economies, as companies’ equity has dropped significantly, causing job losses and bankruptcies across the globe. From a state of reasonable unemployment, countries’ figures have surged higher on a monthly basis. To date, some analysts are expecting the number in the U.S to exceed the 10% level.
For reference, during the 1980-82 recession, the unemployment rate jumped from a low of 5.8% to a high of 10.8%.
In addition, the ECB’s actions caught investor’s attention last week, as Trichet gave into the market’s pressure, reducing its central rate to 1.25%. While economists were expecting a larger rate cut, the ECB president did state that further measures will be considered, for example quantitative Easing. One shouldn’t be surprised to see further rate cuts at their next meeting (May 7th). To date, Trichet is aware of the problems his economy is facing and unlike other leaders, that have reacted a lot quicker to help restore healthy economic growth, Trichet has engaged in much cooler approach, keeping the ECB’s rates relatively higher.
The major question investors are now asking themselves is; whether 1% is going to the lowest level for the ECB.
Lower Rates are Helping Currencies Gain in Value
Unlike during a normal stage in a market cycle, where rising interest rates attract money, interest rate decreases over the last couple of months have had an opposite effect on investor’s psychology. Over the last month, investors have been rushing to currencies yielding lower interest rates, on expectations that those economies will crawl out of their dire situation first. What seems absurd might be economically correct as England has been showing improving data over the last couple of weeks. Last week’s data showed that Services PMI, Manufacturing PMI, Retail Price Index and Consumer Price Index all presented figures higher than analyst’s expectations.
On the Forex market, economic data helped to drive currency pairs into a secondary bullish trend, sending the GBP and the EUR higher against the USD. From a technical point of view the U. S Dollar Index managed to hold above trend line support, just above 84 points.
Conclusion
Despite the gloomy economic outlook and the majority of data still coming out showing a negative future, sentiment seems to be improving across the board. Even though prior government actions are now starting to have an effect on different economies, the end to the current economic downfall still seems to be only a mirage far in the horizon. As stated above, most analysts are expecting to see a turnaround only towards the end of 2009.
The question now is whether the different traded assets are already baking it in to the market’s price. Regarding the Dollar, further weakness could be expected as long as the major indices continue to appeal to investors.
Looking forward, economic calendar is yet again going to have an impact on the currency pair’s intraday movements this week. Major moving data include inflation data coming out from the Euro-zone and an interest rate decision from Japan and England. Unlike previous interest rate meetings, the BOE is expected to hold this time round, keeping its rate at a low of 0.5%.
Technical Charts
EUR/USD
On a weekly perspective the EUR/USD closed barely unchanged, increasing by just over 150 pips. Investors quickly shrugged off the ECB’s interest rate decision, waiting for Friday’s employment data from the U.S. To date the EUR/USD is has now formed a triangular formation pattern, which could signal further strength. One should observe the break of either trend lines for a clearer picture.
GBP/USD
Strong Fundamentals from England along with increasing unemployment from the U.S helped to drive this pair higher. Despite the weekly strength, resistance levels should be taken into consideration especially as this pair is now lingering around major resistance of 1.48. Relative Strength indicators are showing this pair has further room to climb, but with an interest rate decision coming out next week, the movement could be capped.
USD/JPY
After consolidating around resistance of 98.79, this pair soared higher to close the week at…. One must take into consideration psychological resistance of ¥100, which could cause problems on the current uptrend. Indicators are pointing to further strength, but the price pattern could see a slight correction especially around current levels.
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