U.S. producer prices are forecasted to have fallen to -3.7% from -3.5% the month prior on an annualized basis which could start to raise deflation concerns again. The amount of stimulus that the U.S. government is pumping into the economy is expected to eventually spur growth and increase the upside risks of inflation.
Fundamental Outlook
U.S. producer prices are forecasted to have fallen to -3.7% from -3.5% the month prior on an annualized basis which could start to raise deflation concerns again. The amount of stimulus that the U.S. government is pumping into the economy is expected to eventually spur growth and increase the upside risks of inflation. However, if the economic recovery takes longer than expected and prices remain subdued further contraction is a possibility which could lead to higher savings rates by consumers and businesses. The lack of demand could send prices on a downward spiral and the increased savings will soak up the added liquidity putting the economy at risk for deflation. We may not see that much of a reaction with CPI due out Friday, but global deflation concerns were heightened following the BoE’s quarterly inflation report which called for inflation to remain below their 2% target until 2012. Therefore, a significant drop in factory gate prices could add to recent fears and fuel safe-haven flows back into the dollar which would validate the short-term bearish EUR/USD technical outlook.
Technical Outlook
A push above 1.3742 is still required to satisfy the minimum requirement for wave Y, at which time I will expect a top and reversal (objectives are at points from 1.3800 to 1.4200). I published an alert yesterday at the end of New York trading warning that the EURUSD was at risk of a short term top as there were 5 waves completed from 1.3251. A top did indeed register and a bit more weakness is likely prior to a resumption of the rally. Look for support near 1.3490, which intersects with potential trendline support tomorrow. A deeper correction could reach the 61.8% retracement at 1.3251. Again, the larger trend is considered bullish against 1.3251.
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To discuss this report contact John Rivera, Currency Analyst: [email protected]
