[B]Talking Points
[/B]• Japanese Yen: Finds support below 115.00
• Euro: Consolidates near highs, PPI cool
• Pound: GDP better than forecast, as service growth fastest in 3 years
• Canadian Dollar: CPI on tap
• US Dollar: Calendar empty eyes on G-7
A relatively sparse economic calendar and the uncertainty surrounding the outcome of the G-7 meeting later today, kept the major currency pairs in tight ranges on the last trading night of the week. The EURUSD marked time, hovering near record highs, but the pair was somewhat depressed by the latest German PPI news which printed far cooler results than the market expected. The PPI numbers came in at 0.2% versus 0.4% projected while the annual rate slowed to 1.5% - far below ECB’s self imposed limit of 2.0%.
The strength of the euro is clearly having a deflationary impact on pricing in the Euro-zone and therefore raises fresh questions about the need for additional rate hikes from the ECB. Since Mr. Trichet and company have consistently reiterated the fact that their primary focus remains squarely on price levels, today’s report must be viewed as dovish by the market as it shows little need for the European monetary authorities to tighten policy at this time.
None of this may matter with respect to the direction of EURUSD which could continue to climb higher if the Fed decides to lower rates another 25bp in October. This week’s horrid housing and jobless claims data have raised the prospect of such a move to 75% according to the latest pricing of Fed Funds futures. However, Chairman Bernanke must be aware that further monetary easing so soon after the 50bp cut in September, would immediately spur speculation of yet more cuts before the year end and could easily push the EURUSD to the 1.4500 figure within a matter of weeks, destabilizing an already woefully weak dollar.
Finally, news out of UK surprised to the upside as GDP printed at 3.3% versus 3.1% expected with the services component growing at the fastest rate in three years. The latest GDP read suggests that despite the credit crunch and ongoing problems in the financial sector, growth in UK remains robust with little immediate danger of rate cuts from the BoE. The pound was boosted by this news rising to within a few pips of the 2.0500 figure. More interestingly, while tonight’s data offers no clues on the direction of the majors, it does change the dynamic of the EURGBP cross. If rate expectations for ECB are indeed scaled back, as a result of lower PPI data, the cross which hit .7000 once again in overnight trade on further rate hike speculation, may begin to correct towards the 6900 figure as traders adjust to the latest economic news flow.
