[B]Talking Points
• Japanese Yen: Breaks Above 108.00
• Euro: Hot PPI Fails To Inspire Euro Bulls
• British Pound: Construction Slows To Lowest Level In 11 Years
• US Dollar: Personal Income on tap[/B]
The Euro spent the overnight trading sessions stuck in a tight trading range between 1.5525-1.5560, despite producer prices printing at the highest level in 18 years, as FOMC and ECB decisions loom. Manufacturers saw costs rise 8.0% from a year ago with a 0.9% gain in the month of June. A 21.4% increase in energy costs accounted for the majority of the increase. Meanwhile, the Sentix investor confidence index fell to -15.3 from -10, which was the lowest in almost five years.
The European economy continues to weaken along with the argument for decoupling, which has seen the unwinding of those bets. Confidence in the region continues to deteriorate as worries grow that the ECB’s focus on price stability may have put the region at risk for a recession. Manufacturing is contracting and the labor market is beginning to weaken as companies try and battle the headwinds from the U.S. downturn, rising energy costs and a strong Euro. The upcoming PMI services indicator is expected to confirm that that sector which accounts for 70% of the economy has also fallen into contraction. Although, we don’t expect Trichet to reverse the 25 point hike from the central bank’s last policy meeting, but that his focus will shift from inflation to declining growth.
The Sterling continued it’s downward decent as the prospects of a rate hike from the BoE have all but vanished. The GBUSD has fallen over 300 points since July 15, breaking below the 1.97 handle for the first time in nearly a month. The housing market deterioration is accelerating as tight credit markets have left borrowers on the sideline while the glut of inventory continues to pile up. Indeed, falling home prices is weighing on the broader economy as construction dropped to its lowest levels in eleven years, according to the PMI gauge which fell to 36.7 from 37.5 in June. The central bank is expected to keep their benchmark rate on hold despite the expectations that inflation will rise above 4%.
Personal spending and income is on today’s U.S. docket, but these second tier indicators may have minimal impact on price action with the pending FOMC rate decision scheduled for tomorrow. Fed fund futures are pricing in a 91% chance the Fed will leave the overnight rate unchanged, but can they signal a future rate hike with the housing and labor markets continued weakness.
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