Forex Investment and Currency Trading

While financial markets appear to be calming down a bit, the news on the U.S. economy remains volatile. The economy eked out a marginal 0.6% annualized gain in the first quarter, matching the fourth quarter’s increase and marking the weakest two-quarter average growth rate since 2001. The housing market is slipping deeper and deeper into recession, while consumers are edgier, with confidence measures falling and retail sales activity slowing. The steady erosion in the labour market, sky-high energy prices combined
with real estate losses and earlier equity market losses mean that U.S. households will be looking for ways to pare back spending. The arrival of the tax rebates cheques from the government’s fiscal stimulus package beginning in early May should give a boost to retail activity and work to offset some of the drag from these negative factors.

Despite positive growth in the first quarter, falling employment, earlier credit tightening and an expected drawdown in inventories point to a negative growth rate in the second quarter. However, market’s forecast assumes that, by the third quarter, Fed actions to date and the fiscal stimulus package will be to some degree successful and that the economy will grow by 2.9% before slowing to 1.2% in the fourth. Market expects that the moderation in the pace of economic growth in the fourth quarter will be the catalyst for the Fed to trim bac the funds rate but that it will limit the amount of “insurance” easing to 50 basis points.
Inflation fires burning
Despite the slower-growth environment, upward price pressures remain. The headline CPI inflation rate is running 4% higher than a year earlier with the core rate, which excludes the volatile food and energy components, at a strong 2.4%. Upward pressure in energy prices and firm food prices are keeping the annual inflation rate elevated, which risks a further rise in inflationary expectations. The Fed forecasts that inflation pressures will moderate but acknowledged in the April rate announcement statement that the outlook
is uncertain.