Euro Open: Will Bank Earnings Fuel a Dollar Rally?

[DailyFx]

Overnight economic data generally supported priced-in market outlook. The forthcoming session is conspicuously light on fundamental event risk, with Switzerland’s Producer and Import Prices the only significant item on the docket. On balance, economic fundamentals have taken a back seat to overall risk appetite as the primary driver of directional momentum. All eyes have been focused on earnings releases from top firms in the US Financials sector. To that effect, the market may be in for a quiet go-around until Bank of America and Wachovia report earnings late into the session.



Key Overnight Developments

• Australian Producer Prices Print First Decline Since June 2007
• New Zealand Data Adds To Gloomy Outlook


Critical Levels




The Euro traded modestly higher overnight, lifting to test 1.5870. DailyFX Technical Strategist Jaime Saettele has called for a sustained break above the 1.60 mark to target 1.6325. Support is seen at 1.5700. Sterling continued lower following Friday’s losses to test 1.9930. Short-term support is seen in the 1.9925-1.9884 area, while resistance remains at 2.0175.


Asia Session Highlights




Writing about forthcoming New Zealand data, we noted that “June’s Credit Card Spending is sure to continue downward as Kiwi consumers tighten their belts amid deepening economic malaise. While the recent weakness in the Kiwi dollar may have otherwise helped June’s Visitor Arrivals, tourism surely contracted as the global slowdown takes its toll on discretionary spending the world over. In any case, the data is likely to be overlooked as it will take much more than the tourism sector to lift the beleaguered economy out of its current slump.” As it stands, both releases validated our analysis. The former metric fell to 3.3% from 5.9% in the preceding month, while the latter collapsed into negative territory to print at -1.4% versus a revised 9.1% in the previous period.

Moving to the UK, July’s Rightmove House Prices set a record low, annualized decline of -2%. This is not surprising – property sales are the slowest in 30-year while mortgage approvals fell to levels unseen in 9 years. A deeply entrenched slump in housing is expected to bring overall growth to the lowest levels since 1992 over the course of this and the following year. If the current pull-back sees oil prices continue lower, a BOE rate cut may materialize as early as this year.

Australian Producer Prices offered encouraging news to the RBA. The metric eased to 4.7% in the year to the second quarter versus 5.3% expected. This marks the first decline in Producer Prices since June 2007. The metric is seen as a good leading indicator for Consumer Prices and the overall inflation level. The easing in price pressure implied by today’s release suggests RBA policy rates are indeed having the desired disinflationary effect. Writing of June’s New Motor Vehicle Sales, we suggested they are “to extend their current downtrend: high borrowing costs make cars difficult to afford while rising petrol prices make them expensive to operate.” Sure enough, the metric printed at 1.4% in the year to June, a 16-month low.


Euro Session: What to Expect




The forthcoming session is conspicuously light on fundamental event risk, with Switzerland’s Producer and Import Prices the only significant item on the docket. Expectations call for a rise to 4.4% in the year to June, the highest on record. Businesses pass on higher input and production costs to their customers by way of higher prices for finished goods. This means a rise in Producer Prices is likely to boost Consumer Prices and thereby the overall inflation rate. Traders will look for the reading to validate forecasts or surprise to the upside. This will drive speculation that consumer inflation will reach beyond the SNB’s expected 2008 top of 2.9% and force a one-off rate hike.

On balance, economic fundamentals have taken a back seat to overall risk appetite as the primary driver of directional momentum. All eyes have been focused on earnings releases from top firms in the US Financials sector. To that effect, the market may be in for a quiet go-around until Bank of America and Wachovia report earnings late into the session.


To contact Ilya regarding this or other articles he has authored, please email him at ispivak@dailyfx.com.