The global economy remains on relatively solid footing going into February, after U.S. markets rose to new highs thanks to a debt deal and Japan introduced new stimulus in January. While most trader attention is focused on Japan at the moment, potential improvements in the eurozone and an ongoing recovery in the United States shouldn't be discounted.
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U.S. Economy Recovery Gains Steam
The U.S. economy continues to see positive signs of growth, with the U.S. Federal Reserve's Charles Evans projecting 2.5% growth in 2013 and 3.5% growth next year. At the same time, Mr. Evans also forecast that the U.S. unemployment rate would fall to 7.4% this year and then again to 7% next year, which would further normalize the economy over time.
Judging by comments from Mr. Evans, traders should watch for payroll employment figures to increase by 200,000 each month for a number of months in order to confirm such a durable recovery, which would mark an end to one of the most troubling aspects of the slowdown. But even with improvement, low interest rates should keep the dollar at bay for now.
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Eurozone Bottom May Be Near
The eurozone may have posted some bearish figures in January, but many economists agree that the region may have bottomed. For instance, factory output in the eurozone fell for a third straight month in November, but production of machinery used to make other goods rose 0.7% over the same period, suggesting that future business is set to improve.
At the same time, the Organization for Economic Cooperation and Development's (OECD) composite of leading indicators also suggested that growth would accelerate. The indicator was unchanged in November at 100.2 for the second straight month, suggesting that Italy, Germany, France and the euro area as a whole are stabilizing and could help boost the euro
Japan Hopes to Revive Economy
Japan is perhaps one of the most interesting stories in January going into February, after Prime Minister Shinzo Abe took over the country's leadership position. Early last month, Mr. Abe announced a $117 billion stimulus package aimed at improving economic growth through increased spending on public works, disaster recovery and aid to small businesses.
The move put pressure on the Japanese yen against all major currencies and helped the country's equity markets rally. Many investors, however, worry about the country's excessive debt, which has grown from 60% to 220% of GDP over the past two decades. While the effects are yet to be seen, it could become a short-term solution to a long-term problem.
Britain's Economy Remains Weak
Britain's economy remained in a weakened state last month, as its government stuck to a harsh austerity plan that hurt growth. Compounding these concerns is growing uncertainty around the country's ties to the European Union, which could potentially create higher unemployment at the worst possible time. The country has the potential to enter into a triple dip recession.
While these concerns may have held back the sterling against the euro, the country's currency has appreciated on many other fronts. In particular, Bank of England comments on the country's diminishing export prospects could lead to potential monetary policy action, after the pound gained nearly 3.66% since the beginning of the year in aggregate.
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