As we noted earlier, “In a perfect example of a conflict between politics and economics, Dr. Merkel who is facing regional elections in Germany in May is trying to delay any rescue action on the part of EU until those elections have passed. Unfortunately, the Greeks are running out of funds and will need to return to the capital markets by late April putting pressure on Dr. Merkel to act now.” For now the pair continues to consolidate around 1.3500 reflecting the market’s wariness over the upcoming events this week, but if bailout negotiations fall apart euro could be headed to fresh yearly lows.
Meanwhile China warned that it will announce a Trade deficit of -$8 Billion in March, a move that could relieve some pressure on the Chinese to revalue the yuan. However, as some analysts have pointed out, the trade gap – the first since April of 2004 – could be bad news for the Australian dollar if it signals a start of a negative trend for Chinese trade that could cause them to curb consumption going forward. For the time being the markets shrugged off the news, assigning it to seasonal factors.
In UK cable slipped below 1.5000 after inflation data printed cooler than expected at 2.9% vs. 3.0% eyed in the first month on month decline since October as the VAT adjustments finally made their way through the system. The news confirms BOE’s position that the inflationary factors are likely to recede as the year progresses and relieves some of the pressure on MPC policymakers to quickly curb the QE program. Overall the news remains bearish for sterling and traders will likely target the stops at the 1.5000 level once again if dollar strength persists into North American session.
In North America today focus turns to the housing sector where existing home sales are expected to decline once again to 5.01M run rate from 5.05M the month prior. This would be the third consecutive monthly drop and would bode badly for the housing market which continues to act as a damper on US economic recovery. Housing has been the weakest link in the recovery story and threatens to curtail US GDP growth in 2010 if it remains at the 5M unit level. More importantly, if demand for housing remains tepid the Fed will be stationary for longer than the market currently anticipates putting downward pressure on USD/JPY.