Failed Bail-Out Vote, Busy Calendar Spell Forex Volatility (Euro Open)

The US Dollar sharply sold off in the minutes following the American legislature’s rejection of a $700bn financial rescue plan. The currency found itself fighting off the bears to rally in Asian trading. Given the reaction by the US market, Tokyo and Hong Kong equities indices fell less than many had originally anticipated. Forex traders may see additional volatility through European trading as major numbers such as the German Unemployment Rate and Euro-Zone Consumer Price Index estimates are released.

[B][U]Key Overnight Developments[/U]

• Violent Forex Volatility After U.S. Lawmakers Reject Rescue Plan
• British Sentiment Rises for Second Straight Month
• Japanese Household Spending Falls to 2-Year Low: -4.0%

[U]Critical Levels[/U][/B]

[B]Failure of the US Government to pass the financial rescue plan[/B] was met by sharp volatility in the forex market, driving the Euro to a high of 1.4563 from a low of 1.4349 against the US Dollar in the minutes immediately following the legislation’s rejection. Sterling also shot up by 140 pips to a high of 1.8180 as the news quickly gyrated asset markets around the world. The day’s trading saw both pairs fall back below the levels seen prior to the news. EURUSD and GBPUSD now find themselves hugging Fibonacci support at 1.4322 and 1.8025, respectively.

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[U]Asia Session Highlights[/U][/B]

After having fallen to a record low in July, the UK [B]GFK Consumer Confidence Survey[/B] rose for a second straight month in September to -32. The sentiment indicator, which asks consumers and employers about their future expectations for the UK economy, continued to display the affect of falling fuel prices on the pocket books of the British. When questioned about their Climate for Major Purchases, people increased their expectations by the most since the start of 2007. Retail Sales rose in the 12 months through August by 3.3%, beating forecasts of a -0.5% decline in the metric for the month.

Japan’s [B]Jobless Rate[/B] rose to 4.2% in August, the highest level since June 2006 after sluggish consumption continued draining the economy of productive output. The 0.2 percentage point jump from July came after [B]Household Spending[/B] fell for a sixth straight month, by -4.0% from the year prior. Indeed the economy has suffered two straight quarters of negative growth – what many consider the technical definition of recession. Another silent form of labor weakness that has continued to affect the Japanese jobs market has been the reduction in hours worked. Employees in August saw their number of weekly hours shrink for a third straight month. The subsequent release of the country’s [B]Industrial Production[/B] figure saw the metric fall by -6.9%, the lowest level in at least five years. It was then little surprise that the [B]Vehicle Sales[/B] release fell to lows last seen during the latter portion of the East Asian Financial Crisis in 1998 as the metric plummeted by -10.9% from the August before. Yearly [B]Housing Starts[/B] rose for the first time in 13 months by 53.6% in August to shatter analyst forecasts. The sharp rise came primarily as a result of construction deregulation and may not be so indicative of an overall recovery in the economy.

The South Pacific saw some relief as Australian [B]Private Sector Credit[/B] beat economist forecasts by 0.2 percentage points to come in at 10.5% in the four quarters through August. The same month saw the country’s [B]Retail Sales[/B] figure rise 0.3% as easier credit allowed consumers more access to purchasing power. Companies in New Zealand have found themselves feeling optimistic about their future profits after declines in fuel prices and interest rates reduced the costs of production and borrowing; the [B]NBNZ Business Confidence[/B] number came in at 1.6.

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[B]Euro Session: What to Expect[/B]
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The European economic calendar looks decidedly grim. Germany’s [B]Retail Sales[/B] data is expected to see receipts shrink -3.25% in the Euro Zone’s largest economy. Meanwhile, the pace of job creation is set to slow as [B]Unemployment Change[/B] figures are forecast to see the number of jobless Germans reduced by just -18k in September from -40k in August. The acute slowdown of the currency bloc’s economy is reflecting in inflation figures: annualized [B]Producer Prices[/B] are expected sharply lower in both France and Italy. The latter country’s [B]Consumer Price Index[/B] is also pointing to slower inflation readings. Finally, preliminary estimates of the overall [B]Euro Zone[/B] [B]Consumer Price Index[/B] is set to show inflation slowing to 3.6% in September from 3.8% in the preceding month.

On balance, the Euro Zone fundamental picture is a familiar one: growth has deteriorated sharply and inflation is beginning to catch up. The only question now is: When will the [B]European Central Bank[/B] muster the wherewithal to act on interest rates? [B]Jean-Claude Trichet[/B] and company are set to announce rates later this week, though few expect them to issue cuts this time around with inflation still a bit too high above the 2.0% target level. However, as we noted yesterday, bond yield forecasts have shifted in recent days to reflect more aggressive rate cuts than previously expected: the market is now pricing 50 basis points in monetary easing for the first quarter of next year versus the originally expected 25bps. Looking at index swaps, the magnitude of rate cuts expected for the next 12 months quadrupled since just Tuesday of last week.

In the UK, the final revision of second-quarter [B]Gross Domestic Product[/B] is expected to confirm initial estimates showing the economy did not grow at all in the second quarter, bringing the annualized reading to a 15-year low at 1.4%. The [B]Current Account Balance[/B] is expected to fall short -10.1 billion pounds in the second quarter. The trade side of the equation deteriorated 17.1% in the three months to July while loses in the FTSE 100 benchmark equity index and the 10-year Gilt point to weakness on the capital side. On balance, the metric is unlikely to stir much of a reaction as more recent monthly trade statistics have seen exports booming to 2-year highs buoyed by the cheaper Pound.

On balance, today’s House of Representatives “No” vote on the $700-billion financial markets rescue plan will likely dominate as the catalyst for forex price action in European hours. While the Senate is yet to vote on the measure and the House could try the vote again after some additional back-and-forth between Republican and Democratic lawmakers, few observers expected this setback and it will surely fuel continued outflow from risky investments and into cash. Indeed, the Dow Jones Industrial Average collapsed nearly 800 points today for the largest single-day loss ever.

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[U]Related Articles:[/U][/B]

US Dollar Dives as the House Votes Down Bailout Bill - Black Monday Part 2?
Forex Technicals: The Day Ahead, September 30

[I]
To contact Ilya and Luis regarding this or other articles they have authored, please email them at <[email protected]>.[/I]