Euro Weighed By Contraction in Industrial Production and Employment, Erasing Dubai Bailout Gains

Talking Points
•    Japanese Yen: Remains Under Pressure
•    Pound: House Prices Decline For Second Month
•    Euro: Employment Contracts For Fifth Quarter
•    US Dollar: Risk Trends Still Influencing Dollar Movements

Euro Weighed By Contraction in Industrial Production and Employment, Erasing Dubai Bailout Gains

The Euro has regained its footing after overnight releases showed contraction in employment and industrial production in the Euro-zone. European companies continued to trim payrolls in the third quarter leading to a consecutive 0.5% drop in employment and the fifth straight quarterly contraction. Meanwhile, activity in the region ended five straight months of advances reigniting fears that the stimulus driven boost in output would be unsustainable once public funds evaporate. . The dour fundamental data erased earlier gains founded on a surge in risk appetite following the announcement that Abu Dhabi would provide Dubai World with $10 billion to help it avoid defaulting on its debt.

Equity markets are trading higher as investors are confidence that any threat to the financial system is ready to be met by governments. However, we could see concerns over the longer-term implications of the fundamental data re-emerge and weigh on the Euro as the day goes on. Increasing unemployment and the absence of consumption post stimulus efforts has long been a concern of policy makers which continue to see the need of maintaining low interest rates for some time. Indeed, Governing council member Erkki Liikanen stated that the ECB’s exit from extraordinary liquidity measures is not a signal that tightening is ahead. Therefore, we could see the ERU/USD look to re-test support at 1.4626-11/3 low.

The British Pound pushed saw similar price action as the euphoria of the Dubai bailout was met by a c9nsecutuive decline in house price according to Rightmove LLC. The recovery in the sector is expected to have led to positive growth in the fourth quarter ending the country’s worst recession since WWII. However, credit markets remain tight and if we see restrictive lending start to discourage borrowers then further contraction would be ahead. The BoE left their benchmark rate and asset purchase program on hold as it will take another two months to complete their emergency program. The failure of policy makers to bring an official end to their quantitative easing efforts reflects their ongoing concerns of credit markets. Upcoming inflation, employment and retail sales data may help determine future policy action and sterling direction.

Overnight events showed us that the greenback still holds a negative relationship with risk appetite. However, the dollar has started to see that correlation wane as the outlook for U.S. interest rates has improved on the back of the stronger than expected employment and consumption data. Inflation data this week may hold the key to determining the future of the dollar as a funding currency as increasing prices would be the catalyst for future tightening from the Fed. The empty economic calendar today will leave greenback price action at the mercy of the broader trends.


Will the EUR/USD Maintain the Broad Range Going Into Next Year? Join us in the Forum

Related Articles:

Forex Technical and Fundamental Forecasts for December

To discuss this report contact David Song, Currency Analyst: dsong@fxcm.com