The Euro pulled back after reaching a high of 1.2802 despite the unexpected improvement in the German ZEW survey. The downturn in the EURUSD suggests that investors remain bearish against the currency pair as they expect the European Central Bank to ease policy further
Talking Points • Japanese Yen: Breaks Below 98.00 • Pound: Home Prices Tumble Lower • Euro: German Investor Confidence Unexpectedly Improves • US Dollar: IBD/TIPP Economic Optimism Index on Tap Euro, Pound Pare Gains as Fundamentals Fail to Impress The Euro pulled back after reaching a high of 1.2802 despite the unexpected improvement in the German ZEW survey. The downturn in the EURUSD suggests that investors remain bearish against the currency pair as they expect the European Central Bank to ease policy further, and may face increased selling pressures towards the end of the week as the growth figures scheduled for Friday are expected to reflect two consecutive quarters of negative growth. Investor confidence in Germany improved to -53.5 from -63.0 in October as the European Central Bank, along with the Fed and Bank of England, increased their efforts to alleviate fears of a global meltdown. Despite the improved outlook, the Euro slipped below 1.2750 as the interest rate outlook continued to weigh on the currency. ECB council member Guy Quaden said that the central bank is likely to revise their forecasts for inflation and growth ‘substantially’ lower for December as the economy heads into a recession. Increased speculation that the ECB will continue lower the interest rate over the coming months is likely to drag on the Euro over the near-term, and may break below its current range between 1.2500 – 1.300 as investors remain bearish against the currency. Meanwhile, Credit Suisse overnight index swaps now show that investors expect the ECB to lower borrowing costs by nearly 100bp over the next 12 months, which would certainly stoke increased selling pressures for the Euro. Over the week, the Euro is anticipated to hold within range, but may retest the 1.2500 level by the end of the week as fears of a deep and prolonged recession intensify. Like the Euro, the British Pound followed suit, and pared gains after reaching a high of 1.5705. Deteriorating fundamentals for the U.K. has clearly dragged on the Sterling as home prices measured by the DCLG fell another 5.1% in September, following a 4.6% decline in the previous month. Meanwhile, the U.K. trade deficit unexpectedly narrowed to -3.9B from -4.4B in August due to a rise in exports, but the rise in foreign demands could be short lived as fears of a global recession intensify. In addition, lower interest rate expectations may continue to fuel bearish sentiment for the Pound over the near-term as overnight index swaps show that market participants expect the Bank of England to cut the benchmark interest rate by 75bp over the next 12 months. As the economic docket for the U.S. remains light, risk sentiment is likely to dictate price action for the dollar. The greenback may continue to reap the benefit of its safe haven status as the government is forced to step in as conditions only get worse. The government increased the bailout to AIG to $150B, with the Treasury’s Kashkari supporting the historical bailout as he stated that the efforts were ‘necessary’ to ensure stability in the financial sector. The lack of stability in the financial market has certainly heightened growth fears for the world’s largest economy, and growth prospects may deteriorate even further as the credit crunch takes a toll on the real economy. Fears that U.S. automakers may have to seek protection under the Chapter 11 bankruptcy clause has intensified as the White House opposed extending the Troubled Asset Relief Program (TARP) to the automakers, which could ultimately cost the economy approximately 2.5M jobs, which would certainly stoke bearish sentiment for the greenback. Will The EUR/USD Fall to 1.2000? Join us in EURUSD Forum Related Articles: Forex Trading Weekly Forecast - 11.10.08 Euro Remains Heavy As ECB President Trichet Reiterates Dovish Bias ECB Quaden Lowers Growth Forecasts, Further Easing to Follow To discuss this report contact David Song, Currency Analyst: dsong@fxcm.com