The Euro has remained range bound as investors sit on the sidelines with the troubles of the U.S. financial system continuing and a Fed rate decision on tap. The EURUSD spent most of the overnight trading session trading between 1.4220-1.4280. A better than expected ZEW Survey reading failed to spark any bullish price action as German investor confidence improved to 41.1 from -55.5, which far exceeded the -53 that was expected.
[B][U]Talking Points[/U]
• Japanese Yen: Found Support At 103.60
• Pound: Back Inflation Continues to Rise
• Euro: ZEW Improves On Easing Oil Costs
• US Dollar: CPI And FOMC Decision on Tap
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Euro, Pound Consolidate As AiG Troubles Loom, Will The FOMC Cut Rates?[/U][/B]
The Euro has remained range bound as investors sit on the sidelines with the troubles of the U.S. financial system continuing and a Fed rate decision on tap. The EURUSD spent most of the overnight trading session trading between 1.4220-1.4280. A better than expected ZEW Survey reading failed to spark any bullish price action as German investor confidence improved to 41.1 from -55.5, which far exceeded the -53 that was expected.
The ECB injected 30 billion Euros into money markets in an effort to provide liquidity to the markets after the Lehman bankruptcy. The measure may signal that the central bank is far from considering any sort of easing policy as the financial crisis continues to play out and growth in the region contracts. Indeed, MPC member Mersch came out and warned that the committee shouldn’t be hasty in responding to the current crisis as inflation pressures remain as core prices continue to be at elevated levels.
The pound was similarly range bound trading between 1.7900 and 1.8000 despite inflation continuing to increase. Consumer prices rose to 4.7% from 4.4% which will require BoE Governor King to write a letter of explanation to Chancellor Darling as to why the 3% threshold was breached for another quarter. Although easing oil prices have reduced energy costs, food prices continued to inflate rising another 1.3%. The biggest contributor was the housing component at 2.1%, which may be welcomed news giving the sector’s troubles. The BoE is set to offer another 6.3 billion pound repo in order to provide further liquidity to markets. Like the U.S. the British housing sector is in dire straits. Governor King has stated that these measures will only provide short-term fixes and that more funding is needed for a longer term solution. He would go on to say that ``Only private savers or taxpayers via the government can provide such funds.’’, as it appears that the central bank leader is distancing himself from the potential of intervention from the government and Gordon Brown.
The USDJPY has seemed to have found support at 103.60 as the pair has risen back above 104.50 since bouncing from that price level. Risk aversion is still dominating that market, but a possible solution for AiG’s troubles has eased some of the panic that has gripped the markets. Yet the Dow component may be facing bankruptcy if it can’t raise the 75 billion that it needs. Moody’s and S&P lower the credit rating for the troubled insurer which will increase the urgency for the cash infusion. The Fed and Treasury have called on Goldman Sachs and JP Morgan to help generate the needed funding to prevent what could be possible be the biggest problem to hit the financial system yet.
The U.S. docket is filled with event risk in addition to the troubles of the financial sector. Inflation data is due out which is expected to show a slight easing of prices as falling oil prices have reduced energy costs. The diminishing threat of price pressures may add fuel to speculation that the Fed will cut rates at its rate decision today. Indeed, fed funds futures are pricing in a 68% chance of a rate reduction, which is a sharp jump from 0% a week ago. Likewise the credit Suisse Swap Index is also pricing in 23 bps worth of cuts. Despite this increased outlook for easing we don’t believe the FOMC will cut rates, but a dovish statement following the decision could add to the dollar’s recent weakness. However, dollar bulls have to be encouraged that the greenback has held up despite the historic events that have transpired, which could set up for continued strength once the panic eases.
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