Euro Reverses Losses, As Traders Ignore Bearish Comments From ECB's Mersch

DailyFx · August 25, 2009, 6:10am

The Euro has reversed earlier losses derived from bearish comments from ECB member Mersch as equity markets have firmed. The single currency initially fell sharply on the policy maker’s remarks that the current recovery is not sustainable because it is dependant on public funds which offset bullish sentiment derived from the final German GDP figures confirming a 0.3% expansion in 2Q GDP.

[B]Talking Points
• Japanese Yen: Under Pressure After Earlier Support
• Pound: Home Loans Rise to Highest Level Since February, 2008
• Euro: Mersch Warns Recovery Unsustainable
• US Dollar: Consumer Confidence, Housing and Manufacturing Data on Tap
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Euro Reverses Losses, As Traders Ignore Bearish Comments From ECB’s Mersch [/B][/U]

The Euro has reversed earlier losses derived from bearish comments from ECB member Mersch as equity markets have firmed. The single currency initially fell sharply on the policy maker’s remarks that the current recovery is not sustainable because it is dependant on public funds which offset bullish sentiment derived from the final German GDP figures confirming a 0.3% expansion in 2Q GDP. The EUR/USD fell to as low as 1.4252 before finding support to trade back above 1.4300.

In looking at the breakdown of the GDP figures we see that imports and domestic demand were revised lower which supports Mersch’s contention that “without such a sustainable development of demand there will be no new investment”. He would go onto to say that private investment will be lacking without an increase in consumer consumption. Therefore, without the increase in private investment that job creation will be limited making it difficult for spending to significantly increase. Additionally, banks are still reluctant to lend as they continue to make provisions for an increase in credit defaults. Further tightening of lending standards could choke off potential growth and increase the risk of another downturn. The Euro continues to be linked to risk appetite and if we see U.S. equity markets look to trade higher then the single currency could follow suit.

The British pound is also threatening to erase earlier losses as it is finding support from the highest level in mortgage approvals since February, 2008. The BBA measurement of home loans rose to 38,181 from 35,235 as the housing markets continues to make improvements. However, concerns still remain that loans to consumers and small businesses remain difficult to attain which could threaten a U.K. recovery. Support at 1.6390-61.8% Fibo of 1.5982-1.7045is a key level to watch today.

The U.S. dollar remained firm overnight as we saw a pull back in risk appetite during Asian and European trade. However, we have started to see commodity dollars recoup some of their losses and U.S. futures creeping back into positive territory. Therefore, we could see a reversal in sentiment, especially if the slew of U.S. data due to cross the wires supports a brighter outlook. The S&P Case Shiller home price index is forecasted to show that the pace of decline in home prices is continuing to slow. The stabilization of the housing sector is a key variable in a U.S. recovery, especially as it will bring an en to the deterioration of Americans wealth that they have been experiencing the past two years. Indeed, we may see this reflected in the consumer confidence reading which economists are predicting will rise to 47.9 from 46.6… Although, it is an improvement it is still far from May’s reading of 54.80 signaling tha there remains a great deal of concern over a potential recovery.

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