[B]Talking Points
• Yen: Consumer Confidence remains weak
• New Zealand Dollar: House sales plummet off higher rates
• Pound: Takes 2.05 as trade balance better
• Euro: ZEW lowest print in 14 years
• US Dollar: FOMC on tap[/B]
EURUSD lost all of it early morning gains in the wake of lower than expected ZEW readings which printed at their worst level in 14 years. The pair broke below the 1.4700 level after ZEW fell to -37.2 vs. -34.5 projected, its lowest value since 1993. Despite a relatively robust economy, a healthy producer sector and continuing improvement in labor conditions, the sentiment of European investors soured further as higher energy costs and more importantly higher borrowing costs cast a negative spell on future prospects for growth in the region.
The fallout from the US sub-prime fiasco has created very tight credit conditions in the Euro-zone with LIBOR/repo rate spread stubbornly remaining at multi year highs as financial institutions remain concerned about counter party risk. Thus, the problems in the financial sector continue to dominate investment sentiment even as the real economy in the region performs well as evidenced by the release of the French unemployment data which fell to 7.9% - its lowest level in more than 5 years.
Today’s ZEW worse than expected news may temper any potential EURUSD gains even if the Fed makes a relatively dovish statement in its post FOMC announcement. The vast majority of the market anticipates only a 25bp cut and the impact of such an outcome should be minimal as it has been mostly factored into the current price. However, should the Fed emphasize additional downside risks – essentially signaling the prospect of yet another 25bp cut in January - the markets are likely to view such rhetoric as dollar negative and may try to push the pair back above 1.4800 figure.
Nevertheless, the EURUSD will have hard time making it much beyond that level, given today’s dour ZEW readings. Despite President Trichet hawkish posture at last week’s ECB press conference, the European monetary officials will find it inordinately difficult to tighten monetary policy further given the downcast investor sentiment expressed by the ZEW. Only a huge surprise, like a 50bp cut from the Fed could turn market psychology to such an extent that another run to 1.5000 would become a serious possibility.
