FXstreet.com (Barcelona) – Fears of a double-dip recession once again play on market sentiment today after durable goods dropped and the Fed’

Euro in forex trading

The euro is looking to break through the 1.30 level in forex trading against the U.S. dollar. The euro is regaining much of its strength as optimism about the economy, coupled with concern about U.S. fundamentals, provides some interest in the euro.

Indeed, even the news that the trade deficit in Europe has widened is not damping the euro. Instead, forex traders have chosen to look at the news as proof that demand in Europe is rising, and that the economy is likely to improve.

This comes on the heels of the Fed downgrading the U.S. economic outlook. With the fundamentals of the U.S. economy still improving very slowly, and with weakness, it is little surprise that the euro is finding some strength in forex trading.

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U.S. dollar finds some strength in forex trading on risk aversion

Yesterday, the Fed issued its policy statement about the economy. Just a couple of months ago, the statement appeared almost optimistic, with the belief that the economy is more supportive of growth.

However, things have changed in the last little while. With European debt concerns, and continued trouble in the employment situation and the housing market, the Fed has softened its stance on the economy.

Indeed, GFT’s Kathy Lien reports in FX360, the Fed’s tone has turned more cautious:

This month’s statement did include a few changes, most of which pointed toward a worsening environment. The Fed said that “financial conditions have become less supportive of economic growth, largely reflecting developments abroad.” This is compared to their April meeting when they said that conditions were ‘more’ supportive of growth. By recognizing difficulties abroad, the Fed is to some extent acknowledging the fact that the U.S. will see some spillover from the European crisis.

The U.S. dollar moved lower on the economic fundamentals, but is now gaining some degree of strength in forex trading from the resulting risk aversion.

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As leading European economies are being singled out one by one by Moody’

Top currency expert Boris Schlossberg has said that a hung parliament would be a ‘

Sterling continues to tank against the dollar in forex trading

The British economy may require more quantitative easing, according to some policymakers. While it is far from a foregone conclusion, the Bank of England is leaving the door open to further stimulus measures, according to member Posen.

GFT’s Kathy Lien reports in FX360 on the possibility of quantitative easing in Britain:

Given that one of the central bank’s mandates is to keep inflation within target, the lack of inflationary pressures confirms that from a price perspective, there is no pressure to reduce stimulus. He also said a potential output drop is a big concern and because they do not know exactly how the economy will progress, they have to leave the door open on more Quantitative Easing.

Like the U.S. economy, the British economy is not yet out of the woods. The sterling is having difficulty in forex trading as the British economy struggles, and as debt mounts. Britain doesn’t want to end up like Greece, and investors are concerned about the current state of things.

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Sterling falls in forex trading

Today, employment data was released in Britain, showing continued deterioration in the situation. The sterling is falling in forex trading as a result, and concerns continue that Britain will be very slow to recovery from the global financial crisis.

GFT’s Boris Schlossberg reports in FX360 on the labor conditions in Britain:

Labor conditions in the UK economy remain challenging as the country recovers from its worst recession in the post war period. The UK economy returned to positive growth only last quarter – the last of the industrialized nations to do so, and even then, the country’s GDP posted only a meager 0.1% gain. The dour employment news suggests that growth may remain tepid for the foreseeable future, leaving the BOE stationary for 2010 and perhaps beyond.

Until things improve for the British economy, the U.K. pound is likely to struggle in currency trading, no matter how much risk appetite is available in the rest of the world.

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Currency trading with the Aussie

The Australian dollar is getting a boost in forex trading as the risk trade is on — for some currencies. In currency trading, the Aussie is getting a little help from the fact that Chinese bank lending grew more than expected in January, and that is calming some fears that the Chinese economy is slowing.

China is very important to the Australian economy, since it is one of the biggest trading partners. Demand for resources from Australia to China is one of the biggest drivers of the Aussie economy.

The story is different for the euro, though. Normally the euro benefits in forex trading from a healthy risk trade, but troubles over the Greek rescue package, and other concerns about the health of the euro zone, have the 16-nation currency unable to rally against the U.S. dollar.

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Looking at U.S. dollar support in currency trading

Economic data is very important to forex trading, since it provides insight into how much support a currency has. One country’s economy, in relation to another’s, can affect how those relative currencies interact on the FX market. And one economic indicator is the jobs market.

The labor market has been quite weak recently, and even the recent improvements have been reason for skepticism. The Fed appears ready to abandon some of its loose monetary policies, citing improved economic conditions and improvements (albeit small ones) in the jobs market. Additionally, the latest U.S. GDP figures are offering some hope for the economy.

GFT’s Kathy Lien explains in FX360 the reason that it is too soon to be overly optimistic about the jobs picture:

Meanwhile weekly jobless claims continued to fall. The number of people filing for unemployment benefits dropped from 478k to 470k. Continuing claims also declined from 4.659 million to 4.602 million. Given the recent layoff announcements by companies like Verizon, it is difficult to share the Fed’s optimism about the outlook for the U.S. economy. Even though the number of people receiving extended benefits also dropped, we are inclined to believe that this reflects the complete expiration of benefits for some Americans and not acquisition of new jobs.

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In recent memory, the stakes have never been so high, and the global economy has never been so imbalanced. Accordingly, the Fed and the Treasury must be careful that in treating the economic crisis, they don’t inadvertently damage the very foundation of the US economy.