Euro Threatened With German, EZ Investor Confidence to Drop for Third Month

Key Overnight Developments

• UK House Prices May Continue to Gain in 2010, Says RICS
• Australian Dollar Slips as RBA Hints Pause on Rate Hikes

Critical Levels



The Euro trended lower in the overnight session, slipping as much as 0.2% against that the US Dollar. The British Pound followed suit, testing as low as 1.6274 against the greenback. We remain short EURUSD at 1.4881 and short GBPUSD at 1.6648.

Asia Session Highlights



The Australian Dollar slipped lower after minutes from the Reserve Bank of Australia’s December meeting revealed that the central bank now sees itself as having some “flexibility” on monetary policy having raised rates three consecutive times since October. Policymakers saw the arguments for the third increase as “finely balanced,” with the move to benchmark borrowing costs at 3.75% “materially shifting the stance of policy to a less accommodative setting.” The bank’s tone suggested that Glenn Stevens and company may opt to keep rates on hold for a period going forward, with a Credit Suisse gauge of priced-in yield expectations showing traders now see a 65% chance of another rate hike in February versus 80% just yesterday. Still, the RBA said that most lending rates were “noticeably below normal”, adding that rates will need to be adjusted further over time.

Euro Session: What to Expect



Germany’s ZEW Survey of investor confidence headlines the economic calendar in European hours, with economists betting that sentiment declined for the third straight month in December. Investors’ outlook likely soured as discouraging retail sales and industrial production figures called into question the sustainability of the recent rebound in Europe’s largest economy after the boost from government stimulus (both at home and abroad, which has supported exports) runs its course. The analogous report for the Euro Zone as a whole is also expected to print on the downside after Fitch cut Greece’s sovereign credit rating, stoking concerns about the fiscal health of some of the Euro bloc members and even igniting skepticism about the structural integrity of the currency union as it stands today.

UK Consumer Price Index figures are set to show the annual pace of inflation accelerated for the second consecutive month to 1.8% in November. On balance, the release is unlikely to have too much significance for price action considering it falls within the Bank of England’s baseline scenario for the months ahead and so is unlikely to have any near-term impact on monetary policy. Indeed, the central bank pressed on with expanding quantitative easing in November despite its own predictions of a near-term upswing in prices in a concurrently released quarterly inflation report, and made no changes at December’s policy meeting. The BOE expects to complete this most recent round of easing by February and seems likely to remain in wait-and-see mode until then.

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