Is Germany slowing down?
European growth stayed subdued in the first part of 2013, and the effects of the economic slowdown are hitting a resilient Germany. At 48.1 in April, the Purchasing Managers Index (PMI) is now in recessionary territory. As a result, inflation is falling and consumption is weak. The ECB cut interest rates by 0.25 basis points two weeks ago, and more cuts are possible in the coming months if the economic and monetary conditions deteriorate. However, the impact on the economy should be limited. Bank lending is weak due largely to the poor economic conditions. European citizens are growing more and more dissatisfied, and their governments are facing tough decisions. In Italy, the newly appointed coalition of Mr. Letta, which combines the two major Italian parties, is on the brink of collapsing because of partisan politics. In France, Mr. Holland’s approval ratings have declined to their lowest levels. The huge unemployment rate in Spain is taking a toll, especially on the younger generation. Getting back into positive territory will take time as the country is still sensitive to external negative economic influences. However, the steps taken by the government of Mr. Arroyo to get Spain back on track should bear fruit the coming years.
EUR/USD is targeting 1.28
The EUR/USD exchange rate should decline to 1.28/1.27 shortly. According to a study of the cycles, the USD tends to be weak until mid-year and then expands until year-end. The Federal Reserve should keep quantitative easing (QE) active for some time, despite tangible improvements in the real estate and labor markets. In April, the US economy created 165,000 new positions. The private sector is leading the way and has added more than 200,000 new jobs each month over the last three months. It is true that there are still more than two million people without work; the unemployment rate is now at 7.5%. However, hourly earnings have increased by 1.9% year-on-year. While the rate of change in earnings is limited, purchasing power is growing due to a decline in inflation. Over the longer term, however, high government debt and negative interest rates will keep the US dollar under pressure. The EUR/USD should climb to 1.37 by December.
Angelo Airaghi, www.ProfitsOn.com
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