Euro, Pound Consolidate As U.S. Lawmakers Leave Cloud Of Uncertainty

[DailyFx]

The Euro would spend most of the overnight session consolidating in the 1.4350 – 1.4420 range as traders try and asses the impact of the failure of the TARP proposal. Meanwhile another European bank needed to be rescued as Belgium-French lender Dexia received 6.4 billion Euro from the Belgium and French governments.



Talking Points
• Japanese Yen: Weakens As Risk Appetite Returns
• Pound: Sinks As Banking Concerns Mount, As Branford & Bingley Nationalized
• Euro: Inflation Eases, But ECB Remains Firm
• US Dollar: Housing and Manufacturing data on Tap

Euro, Pound Consolidate As U.S. Lawmakers Leave Cloud Of Uncertainty
The Euro would spend most of the overnight session consolidating in the 1.4350 – 1.4420 range as traders try and asses the impact of the failure of the TARP proposal. Meanwhile another European bank needed to be rescued as Belgium-French lender Dexia received 6.4 billion Euro from the Belgium and French governments. The issues of the credit markets have overshadowed fundamental data making the easing of inflation expectations a non-event . The Euro-Zone CPI-estimate dropped to 3.6% from 3.8% showing that falling oil prices are starting to alleviate price pressures. Meanwhile German labor markets remained strong as unemployment rolls fell by 29,000, signaling that the European economy may not be as dire as is currently predicted.

The troubles of the banking system have given rise to speculation that there may be a concerted effort of easing rates from central banks. However, comments from ECB officials today didn’t give any indication that the central bank is changing its stance. AS ECB member Noyer stated "We must keep our heads cool and be objective, we need to stop winding each other up," "There's no reason to panic whatsoever in a radio interview.” Credit Suisse overnight index swaps are still pricing in 89 bps worth of cuts over the next twelve moths as the markets are still expecting the central bank will need to ease rates. This will make President’s Trichet’s comments on Thursday critical in forming the longer-term interest rate expectations.

The Pound saw choppy trading with in a range between 1.8050 – 1.8100. A better than expected print of the final reading of 2Q GDP provided some brief support for the Sterling. Growth in the U.K. was reported higher at 1.5% from the preliminary reading of 1.4% . Nevertheless, it was the lowest annualized reading since 1992 and although the British economy hasn’t technically entered a recession, tight credit markets and a slumping housing market will continue to lower expectations for future growth feeding expectations that the BoE will need to eventually lower their benchmark rate.

Expectations are that lawmakers will eventually pass some form of action to address the current credit crisis and help free markets. However, the shape and from of it is up for debate as the initial proposal was so soundly defeated. Although it may include some of the initial plan set forth by U.S. treasury secretary Hank Paulson, there have been many other options bantered about including increasing the amount of deposits insured by the FDIC. A Jewish holiday may keep the matter on hold until Thursday which may start to weigh on the dollar as the uncertainty could lead to traders seeking safer havens. Expectations have increased that the Fed will cut rates at their October meeting by as much as 50m bps with Fed Funds futures pricing in a 66% chance of a 25 bps cut. Additionally, the economic calendar is expected to show that the underlining problem is persisting as home prices are anticipated to have fallen another 16% in July. Meanwhile the inability of companies to acquire credit is beginning to see them cut back on purchases which is expected to be reflected in the Chicago PMI reading that economist are predicting fell to 53.0 from 57.9 in September.


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