Euro Gains in Focus Ahead of IFO, PMI Data; UK GDP May Disappoint in Third Quarter

Key Overnight Developments

• US Dollar Recovers After Early Selloff in Overnight Trading
• British Pound Higher Ahead of Third-Quarter GDP Report
• China to Keep Stimulus Until 2011, Says Central Bank Adviser

 
Critical Levels



The Euro mirrored broad USD performance (see below), testing as high as 1.5060. Meanwhile, the British Pound managed to build a bit of bullish momentum, adding as much as 0.3% to tip 1.6678 against the greenback.

Asia Session Highlights



The US Dollar saw heavy selling pressure at the beginning of the overnight session as Asian stock exchanges followed Wall St higher at the trading open and weighed on the safety-correlated currency. Prices quickly recovered to consolidate near the New York close ahead of the opening bell in Europe, however, as shares paused to consolidate at higher levels. The MSCI Asia Pacific regional equity benchmark index added 0.5% as Kia Motors, South Korea’s second-largest car manufacturer, reported record profits in the third quarter and Wesfarmers, Australia’s number-two retailer, said sales rose 7.3% in the three months to September. Also helping to drive optimism, Chinese central bank adviser Fan Gang said the government should keep fiscal stimulus in place for another year to allow for a “full recovery in 2011”. Investors fretted that public spending would be scaled back after China’s economy expanded at the fastest pace in a year in the third quarter.


Euro Session: What to Expect



Preliminary October Purchasing Manager Index figures from Germany suggest that the manufacturing sector expanded for the first in 15 months in Europe’s industrial powerhouse. The broader Euro Zone Manufacturing PMI is expected to yield an analogous result. The marquee release for the continent, however, will be October’s German IFO survey of business confidence, with expectations calling for the metric rise for the tenth consecutive month. The most closely-watched Expectations index gauging firms’ 6-month outlook is set to rise to 96.2, showing pessimists among the survey respondents outnumber the optimists by the narrowest margin since May 2008. With both PMI and IFO figures, traders will be paying the most attention to the effect the level of the Euro is having on companies’ outlook in the all-important export sector, with the single currency’s recent gains making European goods the most expensive since December for foreign buyers.

Meanwhile, UK Gross Domestic Product is expected to expand for the first in six quarters in the three months through September, adding 0.2% from the previous period and bringing the annual pace of contraction down to -4.6%. Leading indicators are not as optimistic, however: the National Institute of Economic and Social Research (NIESR), a closely followed London-based think tank, forecast that GDP will yield a flat result in the third quarter. NIESR director Martin Weale cautioned that “industrial production was much weaker than we expected in August.” A disappointing outcome here, particularly on the heels of yesterday’s lackluster retail sales report, could stoke expectations that the Bank of England could indeed expand its asset-buying program or even cut the interest rate it pays banks on their reserve deposits when an updated inflation forecast is published in November.

On balance, trends in risk appetite remain the dominant catalyst for currency markets and the data docket seems largely supportive of further gains in equities, commodities, and high-yielding currencies at the expense of the battered US Dollar in European hours. While downside surprises (and the resulting volatility) are certainly within the realm of possibility, any correction lower can’t be expected to have a lasting effect as third-quarter results for the likes of Microsoft and Honeywell International cross the wires late into the session. While positive outcomes here are certainly far from guaranteed, the path of least resistance appears to be higher for risky assets for the time being.


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