[B]Talking Points[/B]
• Japanese Yen: GDP grows faster than expected
• Pound: RICS worse but CPI hotter keeping rate cuts at bay
• Euro: Rallies to 1.4600 but soft data stalls the move
• US Dollar: Pending Homes on tap
EURUSD made a run at the 1.4600 figure in early London trade but the worst investor confidence reading in almost 15 years stymied the pair’s rebound as the costs of record high exchange rate are starting to negatively impact sentiment in the region. The ZEW survey printed at -32.5 versus -20 expected as investors pared their growth forecasts for 2008.
We’ve been pointing out for the past month that Euro-zone manufacturing data is signaling a marked decline in output as euro continues to scale record highs. Today’s Industrial Production which printed at -0.7% vs. -0.4% served only to confirm the fact that the industrial sector is having competitive difficulties as EURUSD exchange rates put a crimp on demand.
Despite clear evidence of slowdown in growth in the Euro-zone, the market remains resolutely dollar bearish, keeping any retracements in the EURUSD relatively shallow. As we noted yesterday, only if the EURUSD breaks below the important 1.4500 figure will we have confidence that a serious correction in the pair has commenced. For the time being the market continues to give the benefit of the doubt to the ECB while expecting the Fed to steadily lower rates.
Today’s Pending Home sales data may resolve the price action one way or the other. Should the report miss to the downside once again indicating further deterioration in the housing market, traders will likely heighten their expectations of another Fed cut in December. However, if the currency market sees some signs of stability in US housing, the dollar may get a boost pushing the EURUSD below the key 1.4500 level for the first time in two weeks.
Meanwhile, UK data was mixed today, with RICS housing survey showing further declines to -22 from -19 projected, registering the largest drop in 6 months. The RICS survey is our favorite gauge of UK housing activity and it suggests that pricing pressures in the sector are clearly slowing. On the other hand, UK CPI data printed hotter than initial forecasts rising 2.1% on a year over year basis against 1.9% projection. The headline number is above the 2.0% BoE target rate and pours cold water on any notion that the UK central bank will be able to ease monetary policy any time soon. Cable, which came under vicious profit taking over the past few days, stabilized on the news and the EURGBP cross receded off its recent highs. If markets become convinced that BoE will remain stationary rather than cut rates while the ECB remains stationary rather than raise them, the cross may be in for more downside as traders make adjustments to their monetary expectations for each currency.
