The Euro saw choppy trading throughout the overnight sessions as momentum from profit taking after yesterday’s historic drop was offset by weak manufacturing data. The Eurozone PMI reading fell to 45 from 47.6, which was the lowest level since records began in 2006.
[B][U]Talking Points[/U]
• Japanese Yen: Tankan Index Turns Negative For First Time In Five Years
• Pound: PMI Manufacturing Dr
• Euro: Inflation Eases, But ECB Remains Firm
• US Dollar: Housing and Manufacturing data on Tap
[U]Euro, Pound Consolidate As U.S. Lawmakers Leave Cloud Of Uncertainty.[/U][/B]
The Euro saw choppy trading throughout the overnight sessions as momentum from profit taking after yesterday’s historic drop was offset by weak manufacturing data. The Eurozone PMI reading fell to 45 from 47.6, which was the lowest level since records began in 2006. The region also saw unemployment rise to the highest levels since May 2007 as the credit crisis has weigh on the economy and in turn the labor market. Despite the dour data the EURUSD remained firm holding onto early gains which has the pair trading above 1.4150.
Growth in Europe is expected to continue slowing which was evidenced by the fall in new orders to 42.5 from 41.7 and the headline readings fourth straight month in contraction. A slowing economy and tight credit markets may force the ECB to consider a rate reduction at their meeting tomorrow, the Credit Suisse overnight swap index continues to price in over 90bps of rate cuts over the next twelve months. Although many committee members have stated that the central bank must not over react, the dire circumstances may be changing their philosophy, as ECB member Jean Claude Junker stated that the MPC will “consider all elements in rate decision”. The need for the individual countries to take action to support local banks like Ireland did today, may lead to the central bank developing a more concerted effort. Regardless of the plans, interest rates at the current levels are clearly stifling growth and a reduction may be imminent by year’s end. As interest expectations decline the Euro may continue trading heavy. Another test of 1.40 could is likely before the upcoming rate decision.
The Pound saw choppy trading between 1.7770 and 1.7870 after yesterdays over 300 bps drop. The manufacturing PMI reading experiencing its sharpest decline since 1992 briefly weighed on the sterling but profit taking would push the GBPUSD back above 1.7830. The reading fell sharply to 41.0 from a revised 45.3 as new orders dropped to 36.1 from 41.9 signaling that more weakness is forthcoming. Additionally, the index of services reading stagnated for the first time in six years, which accounts for 75% of the economy. The stalling U.K. economy is expected to force the BoE to cut rates at next week’s policy meeting with Credit Suisse overnight swap index pricing in 124.3 bps of cuts in the next twelve months. Therefore the pound could see further declines and head back towards the 1.7500 price level.
The U.S. ISM manufacturing report is due today and with the sharp declines in activity in Asia and Europe, we may see a similar drop. The headlines will be dominated by the potential revival of the rescue plan and the modification of mark to market accounting rules, but a sharp drop in manufacturing may offset any bullish sentiment generate by the potential actions from lawmakers and regulators as the outlook for the U.S. and global economies dim. However, an inline or better than expected print, like we saw in the Chicago PMI, could ignite another dollar rally. The growing sentiment is that the U.S. despite all its ills is near a bottom, versus the European and Asian economies which are lagging behind. Indeed, anticipation of the passing of some form of rescue plan sent the greenback soaring yesterday and with the Senate set to vote on a modified plan tonight, we could see bullish momentum continue.
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