The euro strengthened to reach an intraday high of 1.4767 during the overnight session due to an unexpected rise in consumer sentiment, but pulled back to hold near 1.4720. The German GfK consumer confidence index improved in October as falling oil prices helped to boost future growth expectations.
[B][U]Talking Points[/U]
• Japanese Yen: Merchandise Trade Balance Falls into Deficit, Inflation Rises
• Pound: Peaks to 1.8667 Before Breaking below 1.8600
• Euro: German Consumer Confidence Unexpectedly Improves
• US Dollar: Durable Goods and New Home Sales on Tap
[U]
Euro Bounces Higher as German Consumer Confidence Improves[/U][/B]
The euro strengthened to reach an intraday high of 1.4767 during the overnight session due to an unexpected rise in consumer sentiment, but pulled back to hold near 1.4720. The German GfK consumer confidence index improved in October as falling oil prices helped to boost future growth expectations.
German consumer confidence unexpectedly improved to 1.8 from 1.5 in September on the back of falling oil prices. Indeed, the improved sentiment should help to brighten the growth outlook for Europe’s largest economy, but a breakdown of the report showed that all of the components continued to hold in negative territory, which suggests that the economy is far from recovery. Amid mounting growth concerns for Germany, the ECB persists to hold a hawkish outlook on inflation, which suggests that the central bank will hold the benchmark interest rate steady at 4.25% for the rest of the year. Meanwhile, the M3 money supply growth cooled in August, falling to 8.8% from 9.3%.
Elsewhere, the Japanese yen gained overnight to break below 106.00 to hit a high of 105.46 against the U.S. dollar. Mounting growth concerns for the world’s second largest economy continues to strengthen the argument that Japan has fallen into a recession as the merchandise trade balance fell into deficit for the first time since January. The trade balance slipped to -324.0B from 91.1B in July as exports to the U.S. fell at a record pace. Fading demands suggests that economic activity for the export oriented country may remain subdued for the rest of the year, and conditions may only get worse as rampant inflation continues to sap purchasing power. Furthermore, the corporate service price index inched higher in August, rising to 1.4% from 1.3%, signaling that inflation will be an ongoing concern for the BoJ as growth prospects dissipate.
The U.S. durable goods order index highlights the main event risk for the U.S. dollar, and may increase volatility in the market as the Congressional hearings for the $700B bailout plan comes to an end. Durable goods are anticipated to fall 1.5% in August, signaling that economic activity may weaken further as consumers deal with higher living costs. Meanwhile, new home sales is anticipated to slip to 510K from 515K in August, which suggests that the housing market will remain subdued for the remainder of the year.
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