Euro: Fundamentals Fade, Euro/Dollar Rally May Be Running Out Of Gas

A steady and deep selloff was in store for the euro Thursday as disappointing data put the currency in juxtaposition to the rebound in confidence behind the US dollar. The morning began with comments made by ECB Governing Council member Nout Wellink. Not sharing the same confidence that his colleague Bonello expressed yesterday, Wellink (who also happens to be the head of the Basel Committee on Banking Supervision) said he expected market uncertainty and volatility to last for ‘some time.’

While European policy board members are not mute on the severity of the recent financial crisis, there comments often deflect expectations for problems to intensify in the Euro Zone economy. While much of the crisis that has developed in the US has been generated by a panic, there were still fundamentals to support the fears. The ECB has been promoting stability through verbal reassurances and coordinated liquidity injections; but should conditions worsen, the weakened economy and ailing domestic financial sector could still deteriorate on its own (indeed, there is not likely to be any specific aid earmarked in the US bailout plan for the EU). From the economic docket, a few high profile indicators generated interest from the fundamental crowd. The GfK consumer confidence survey offered a surprise in an unexpected improvement – the first in five months. After investors and business leaders reported a pessimistic outlook on the deterioration in the financial sector, consumers were seemingly more concerned with the drop in energy costs. However, even officials at GfK found this unusual given the dour outlook for the economy and trouble in the credit market; and the group lowered its expectations for consumption this year. A little later, the M3 money supply report (a favored gauge of inflation) slowed to its slowest pace of growth since October of 2006 as bank lending and consumer spending cooled. As this was a reading for August, the next reading is likely to be even lower. Looking ahead, only the German import inflation indicator holds prominence, but the country’s preliminary September may also hit the wires before the end of the week. As ECB President Trichet holds adamantly to inflation, weaker numbers may finally encourage rate cuts.