Forex Analysis: Euro May Fall as German CPI Stokes ECB Rate Cut Bets

The Euro may find itself facing selling pressure as German CPI hits a three-month low, hinting the ECB could expand stimulus efforts as growth flounders.

Talking Points

• Euro May Fall as Soft German CPI Drives ECB Rate Cut Expectations
• US Dollar, Japanese Yen Higher on Haven Flows as Asian Stocks Decline

The preliminary set of October’s German CPI figures headlines an otherwise quiet European economic calendar. Expectations call for the annual inflation rate to decline to 1.9 percent, a three-month low. The result may weigh on the Euro as forex traders interpret easing price pressures as giving the ECB room for expanded stimulus measures to shore up the sagging currency bloc economy. Indeed, figures released last week showed manufacturing- and service-sector activity shrank at the fastest pace in 40 months in October.

The US Dollar and Japanese Yen advanced in overnight trade as Asian equities declined, boosting demand for the go-to haven currencies. The MSCI Asia Pacific regional benchmark equity slipped 0.2 percent. The newswires tipped a disappointing earnings report from Honda Motor Co – the world’s seventh-largest automaker – as the catalyst for the selloff. Honda reported profits and sales that trailed analysts’ estimates while slashing their full-year outlook citing reduced Chinese demand.

Anxiety about the impact of Hurricane Sandy, a large tropical storm making its way to the east coast of the United States, likely compounded selling pressure. US financial markets will be closed on Monday and may remain so into Tuesday because of the storm. Needless to say, the degree to which Sandy will disrupt economic activity over the weeks and months ahead remains uncertain. Indeed, the hurricane may prove to have a significant impact on overall risk appetite in an environment where markets continue to hope a firmer recovery in the US will help offset weakness in Europe and Asia.

Asia Session: What Happened

Euro Session: What to Expect

Critical Levels

--- Written by Ilya Spivak, Currency Strategist for Dailyfx.com

To contact Ilya, e-mail ispivak@dailyfx.com. Follow Ilya on Twitter at @IlyaSpivak

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