US GDP Poor, But Europe Still Problematic

The following is a worthy analysis from Marc Chandler of Brown Brothers Harriman regarding the recent GDP numbers released in the U.S. and their significance for currencies (emphasis mine):

The initial reading of the US Q1 GDP was worse than expected, though the dramatic fall in inventories and the tax cuts that went into effect April 1 still suggest that better days are ahead. In Europe, the ECB’s Weber played down the improvement in sentiment indicators. He warned of a significant European contraction this year. Earlier the Econ Minister had forecast a 6% contraction in Germany this year. Weber warned that although he pace of contraction may ease, a recovery in 2010 at the earliest is dependent on resolving the toxic asset problem, for which there is much uncertainty, despite of course the different regulatory regime. ECB President Trichet argues that the dealing with the toxic assets is a fiscal issue not a monetary issue. In contrast, the US does not appear to be drawing such a fine distinction. But Trichet’s statement, it does not mean that the ECB has not opinion. Weber urges German politicians to resist demands for additional fiscal stimulus.

The euro, which had dipped below $1.30 yesterday, has again advanced to challenge the upper end of its recent range near $1.33. A break of $1.33 could see a quick run toward the down trend line drawn off the late March and early April highs and comes in near $1.3375 today. That said, there is talk of good demand for $1.3500 and higher calls for short-dated (1-2 week) euro calls. The 5 day moving average is likely to cross above the 20 day average, which we find to be a useful trend indicator. Technical indicators, such as momentum readings do not stand in the way of another leg up in the euro. Of course, next week brings the ECB meeting, where additional measures, or really modifications of existing programs, are expected. The day after the ECB meeting, the US reports employment figures and another 600k+ jobs are expected to have been lost.

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