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Forex price action consolidated in overnight trading after US Dollar selling accelerated in US hours, set off at the open of stateside bond markets as traders reacted to the first leg of the Fed's purchase of $300 billion in Treasuries to bring down medium- to long-term borrowing costs. German Producer Prices top the calendar in European hours.

Key Overnight Developments

• Euro Stalls, British Pound Lower Against US Dollar in Overnight Trading
• Asian Stocks, US Index Futures Lower Ahead of European Market Open

Critical Levels

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The Euro consolidated NY-session gains in overnight trading, oscillating around the 1.3650 level. The British Pound inched lower, losing its grip on the 1.45 mark to shed as much as -0.5% against the US Dollar.

Asia Session Highlights

With no market-moving data on the economic calendar, traders saw forex price action consolidating in overnight trading. The New York session was marked by a sharp US Dollar selloff starting at the open of American bond markets as traders reacted to the first leg of the Fed's purchase of $300 billion in Treasuries to bring down medium- to long-term borrowing costs. Asian stock exchanges pulled back after seeing the biggest weekly gain since August 2007, with the MSCI Asia Pacific Index slipping -0.9% on profit-taking. US equity index futures are down close to 1%.

Euro Session: What to Expect

Germany's Producer Prices are set to shrink -0.2% in February, bringing the annual pace of wholesale inflation to a 14-month low at 1.3%. Although the release would typically suggest further downward pressure on consumer prices as manufacturers pass on lower production costs through cheaper finished goods, we saw annual German inflation rebound to 1.0% in February from a 5-year low at 0.9% in the preceding month. The broader Euro Zone consumer price index also inched higher to 1.2% in the year to February, issuing the fist uptick since price growth peaked at 4% in July 2008.

Indicators measuring business and consumer sentiment extended months of losses to set new all-time lows in the same period, so it seems unlikely that this inflation will be of the benign variety that comes with renewing vigor in economic activity. Rather, currency depreciation may be the reason headline inflation is creeping higher. On average, the Euro has fallen -15.6% through February against the currencies of the regional bloc's top five import partners since peaking in mid-July, raising the cost of foreign-made goods for consumers on the continent. The implications of this trend could be quite ominous considering the pace of price growth is rising even as the economy sinks deeper into recession, limiting the ability of the European Central Bank stimulate growth through monetary policy for fear of letting price growth skyrocket. Where some countries are worried about deflation (falling prices), it seems the Euro Zone could see stagflation (rising prices and falling output) as a real threat in the near term.


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