Euro Falls On Weak China GDP and Record Low Industrial Production, Will JP Morgan Chase Earnings Increase Optimism?

The Euro has steadily declined since China’s GDP report was released erasing gains from yesterday built on the rising U.S. equity markets. The world’s third biggest economy saw growth fall to its slowest pace in nearly a decade at 6.1% as exports continued to decline. The country has been a source of growth for the global economy and slumping demand for its goods is a reflection of the weakness that has gripped the broader economy. The euro/ dollar had reached as high as 1.3270 before its current descent which sent it to 1.3130 before finding support. Euro-zone February industrial production falling by a record 18.4% added to bearish sentiment lead by a 4.3% drop in durable goods. Also, the region’s March CPI was confirmed at 0.6% which will perpetuate deflation concerns as it is below the central bank’s 2% target.

The Euro-zone continues to show signs of weakness and the lowest level of activity since record keeping began in 1986 underlines the region’s troubles. As factories continue to slash employees as they try and cut costs amidst falling output, we may see the worst recession in 60 years continue to deepen. The ECB is starting to finally talk of taking aggressive measures to curb the downturn with influential committee member Axel Weber talking quantitative easing and further rate cuts yesterday. The head of the Bundesbank said that the central bank should focus its non-standard efforts at banks instead of capital markets as is the case with the Fed and BoE. He would also argue for the use of a rate cut to battle potential deflationary pressures but warned that cutting below 1% could discourage interbank lending and lead to additional problems. Therefore, expectations are that the ECB will announce quantitative easing measures at their next policy meeting with a rate cut at the subsequent gathering. Having fallen below the 100-Day SMA a test of the 50-Day SMA at 1.3035 seems highly likely for the EUR/USD.

The Pound also saw weakness on the dour global growth outlook which saw the sterling/dollar fall 200 pips from 1.5070 to 1.4870. Unlike the Euro the cable has had growing support as the pair took out the February 9trh high of1.4988 yesterday which leaves the 1/9 high of 1.5375 as the next barrier. Unless, we see a significant bout of risk aversion we expect the pound to continue its upward trajectory as the BoE has been ahead of the curb in providing liquidity to its markets which should start to bear fruit in the second half of 2009.

The dollar saw across the board gains during overnight trading as global growth fears were fueled by China’s weak GDP figures. U.S. markets shook off similar concerns yesterday but a source of recent optimism has been the expectations that China would rebound faster than originally expected. Now that this has been brought onto question focus will turn to the prospect of a U.S. recovery, which today’s economic docket will shed some light as we will see housing, employment and manufacturing data cross the wires. Housing starts are expected to slip to 540,000 after February’s unexpected surge to 583,000. Meanwhile, initial jobless claims are expected to fall to 660,000 from 654,000 which should add to current growth fears as the fundamental data demonstrates that the labor market continues to deteriorate which will threaten any recovery in the housing sector and the broader economy. Therefore, we should continue to see dollar support if the domestic growth outlook follows the dimming global prospects. However, an unexpected improvement in these figures in conjunction with the expected improvement in the Philadelphia Fed manufacturing reading could help offset current pessimism and weigh on the green back. Additionally, JP Morgan Chase is due to report earnings and if they can continue the trend of positive earnings from the banking sector it could help fuel optimism.