Euro Open: Paulson Rescue Plan to Spark Forex Volatility

The Euro drifted higher, rallying firmly above the 1.45 level. The Pound oscillated in a wide 115-pip range in overnight trading. With no data releases slated for release in European trading hours, forex traders will see risk sentiment dominate attention as the markets react to the US Treasury’s proposal to concretely address the credit crunch.

[B][U]Key Overnight Developments[/U]

• UK House Prices Continue Falling in September
• Bank of Japan Meeting Minutes Offer Little New Insight
• Australian Vehicle Sales Hit 7-Year Low[/B]

[U][B]Critical Levels[/B][/U]

The Euro drifted higher, rallying firmly above the 1.45 level. DailyFX Senior Currency Strategist Jamie Saettele sees room for a bullish correction as long as price remains above 1.4071. Near-term support now stands at 1.4251, with resistance at 1.4715. Sterling oscillated in a wide 115-pip range in overnight trading. Support is seen at 1.8050, while resistance is seen at 1.8523.

[U][B]Asia Session Highlights[/B][/U]

In the UK, [B]Rightmove House Prices[/B] fell another -1.0% on a monthly basis, suggesting home values plunged -3.3% in the year to September. While the speed of decline has slowed, the reading remains firmly in negative territory. The deep slump in the housing market has severely damaged household wealth, depressed spending, and slowed economic expansion. Indeed, GDP growth stopped in the second quarter, printing at 0.0% in the three months to July. This is the lowest reading in 16 years, with most indications favoring a fall into negative territory in the third quarter. As we mentioned in our Forex Trading Weekly Outlook, “the market forecasts that the BOE to begin cutting rates in the fourth quarter of this year and expects 100 basis points in easing over the next 12 months.”

Australian [B]Motor Vehicle Sales[/B] fell -7.2% in the year to August, issuing the worst reading in 7 years. The poor showing reflects Australians’ unwillingness to take on big-ticket purchases, suggesting things are not as rosy as recent upticks in consumer sentiment surveys would have us believe.

Minutes from the August 18-19 meeting of the [B]Bank of Japan[/B] offered little new insight. Bank officials continued to express concern about the uncertainty of the global financial markets. All told, the focus remains on economic growth and policy rates are likely to remain on hold at 0.50% for the foreseeable future.

[U][B]Euro Session: What to Expect[/B][/U]

With no data releases slated for release in European trading hours, forex traders will see risk sentiment dominate attention as the markets react to the US Treasury’s proposal to concretely address the credit crunch. Looking to stock markets for a gauge, we note that Asian indices moved sharply higher in early Monday trading, playing catch-up to Friday’s rallies in Europe and on Wall St on when initial news of the cure-all plan emerged. [B]US Treasury Secretary Henry Paulson[/B] has advocated moving the cancerous mortgage-linked assets that sparked the turmoil to a dedicated government entity that would then liquidate them. The setup is very similar to the Resolution Trust Corporation that was set up in the 1980s to purge bad mortgages and non-performing real estate assets during the Savings and Loan crisis. A ban on short-selling across major global exchanges added to upside momentum.

Despite the seemingly positive momentum, US Index futures are trading lower overnight. This suggests bullish sentiment may lose steam after Asia prices in Friday’s action. Investors could be second-guessing the good news as the[B] US Congress[/B] begins to haggle over the details of the Treasury’s proposal, with some lawmakers wanting to pass the measure as-as while others pushing to have the legislation include additional provisions. These include greater oversight, executive compensation limits for firms seeking government help, and relief for Americans holding mortgages they can’t afford. The cost of the proposal is also an issue: the Paulson plan is expected to add $700 billion to the national debt, which some argue will weigh heavily on the Dollar.

[U][B]Related Links:[/B][/U]

US Dollar Dives On Return To Risk, Paulson/Bernanke Could Add to Losses Next Week (Forex Video)
Dollar Bearish Patterns Playing Out

[I]
To contact Ilya regarding this or other articles he has authored, please email him at <[email protected]>.[/I]