Euro Tumbles Lower as Austria Nationalizes Hypo Group, British Pound Maintains Narrow Range

Talking Points
•    Japanese Yen: Mixed Price Action Across the Board
•    Pound: Consumer Prices Tops Forecasts
•    Euro: Austria Nationalizes Hypo Group
•    US Dollar: Producer Prices, Industrial Production on Tap

Euro Tumbles Lower as Austria Nationalizes Hypo Group, British Pound Maintains Narrow Range

The Euro pushed back below the 100-Day SMA (1.4647) and slipped to a fresh monthly low of 1.4523 as the Austrian government nationalized Hypo Group Alpe Adri, the sixth largest bank in the region, in an effort to prevent the collapse of the European banking system. Austria’s Finance Minister Josef Proll announced that the government will take a 100% stake in the firm and shore up EUR 450M in fresh capital as European Central Bank President Jean-Claude Trichet sees a risk of a “domino-effect” that could weigh on the real economy and Austria’s sovereign credit rating.

Nevertheless, investor confidence in Germany weakened for the third month in December, with the ZEW survey slipping 50.4 from 51.1 in the previous month, while the gauge for the current situation tipped higher to -60.6 from -65.6 in November. At the same time, investor sentiment in the Euro-Zone plunged to 48.0 from 51.8 during the same period amid expectations for a drop to 50.0, and the data reinforces a weakened outlook for the region as policy makers continue to see a risk for a protracted recovery. Meanwhile, labor costs in the euro-region grew at an annual pace of 3.2% in the third quarter after increasing a revised 4.3% during the three-months through June, which was well below forecasts for a rise of 3.5%, and businesses may keep a lid on production and employment throughout the first-half of the following year as they face tightening credit conditions paired with the slump in global trade. As a result, the EUR/USD may continue to retrace the advance from earlier this year as the outlook for growth and inflation remains weak however, we may see a corrective retracement over the remainder of the week as the daily RSI approaches oversold territory.

The British Pound retraced the previous day’s advance following the rise in risk aversion, and continued to hold the narrow range from the previous week ahead of the U.K. jobless claims report due out tomorrow at 9:30 GMT. Meanwhile, consumer prices in the region increased 0.3% in November to top forecasts for a 0.2% rise, while the annualized rate expanded 1.9% from the previous year after growing 1.5% in the previous month. Moreover, the core rate of inflation increased to 1.9%, which was in-line with expectations, while retail prices increased at an annual pace of 0.3% in November, which is the highest rate of growth since December 2008. In addition, a report by the Royal Institute of Chartered Surveyors showed its gauge of home prices increased 35% in November after growing 34% in the prior month, and conditions are likely to improve throughout the following year as the expansion in monetary and fiscal policy continues to feed through the real economy. As price pressures intensify, the Bank of England is widely anticipated to maintain its current policy throughout the first-half of the following year as the central bank maintains its dual mandate to ensure price stability and to promote full-employment, and long-term expectations for higher interest rates in the U.K. may keep the GBP/USD bid going into the following year as policy makers see the economy emerging from the worst recession since the post-war period.

The greenback rallied across the board, with the USD/JPY rising to a high of 89.44 following the rise in risk aversion, and the reserve currency may continue to strengthen going into the North American session as equity futures foreshadow a lower open for the U.S. market. At the same time, producer prices in the world’s largest economy are forecasted to expand 0.8% in November after rising 0.3% in the previous month, while the annualized rate is anticipated to rise 1.8% from the previous year, which would be the fastest pace of growth since October 2008. Moreover, the Empire manufacturing index is projected to rise to 24.00 in December from 23.51 in the month prior, while industrial outputs are expected to expand 0.5% after increasing 0.1% in October.


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Forex Weekly Trading Forecast - 12.14.09

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