The Euro rallied over 100 bps after the release of the Euro-Zone October producer price report. The single currency found support despite factory gate prices falling 0.8% which was greater than the 0.3% that economists had predicted.
Talking Points • Japanese Yen: Back Above 93.00 • Australian Dollar: RBA Cuts Rates By 100 bps • Pound: Construction Activity Falls To Record Low • Euro: Gains Despite Falling PPI • US Dollar: Paulson To Speak Today Euro Gains Despite Easing Producer Prices, How Deep Will ECB Cut Rates? The Euro rallied over 100 bps after the release of the Euro-Zone October producer price report. The single currency found support despite factory gate prices falling 0.8% which was greater than the 0.3% that economists had predicted. Slowing growth and falling energy prices would drag the annualized rate to 6.3% from 7.9^% which is the lowest since April. Looking at the breakdown we see that falling energy prices are beginning to filter through to other areas as the cost for intermediate goods dropped 1.0%. Abating price pressures will give the ECB the room to continue their current easing policy with economists predicting that the central bank will cut rates by 50 bps on Thursday. The markets have been calling for more aggressive monetary policy action as the region has slipped into recession and has seen manufacturing activity fall to a record low. Yet, recent rhetoric from MPC members has signaled that they will continue their measured approach as they adhere to their mandate of price stability. However, Credit Suisse overnight index swaps are pricing in a 141 bps of rate cuts over the next twelve months as traders believe that it is inevitable that more cuts are coming. Therefore, we may see the Euro continue to remain range bound until we hear President Trichet’s comments following the policy action. The Pound remained under pressure during the overnight sessions despite a brief rally on the back of positive equity markets. The expectations that the BoE will cut rates by 100 bps, has remained a weighing factor for the cable. U.K. construction activity falling to 31.8 from 35.1 - the lowest level since records began in 1997, is a clear sign that the U.K. economy is headed for a deep recession. Recent global growth fears has started to undo the coordinated efforts to lubricate credit markets which may prevent the housing market that is in its worst slump since the Great Depression from turning around. The RBA cut their benchmark rate by 100bps which was more then the 75 bps that the markets were expecting. However, the Australian dollar rallied on the news as central bank governor Stevens signaled that this may be the end of their current easing cycle. The fourth rate cut in as many months brings the benchmark rate to 4.25%-the lowest since December, 2001. Speculation that a $150 billion will be invested in U.S. banks by the U.S treasury through the TARP plan has Dow futures pointing higher and the dollar under pressure. A relatively empty economic calendar will leave price action at the mercy of risk winds and after yesterday’s historic sell off; we could see a bounce in equities today. Hank Paulson is scheduled to speak today and the U.S. Treasury’s comments always present event risk, especially of he confirms the rumors of the direct investment in U.S. banks. However, the downside risks remain to the global economy and until traders are certain the worst is behind us, the dollar will remain supported which will limit its losses in the near-term. Will The EUR/USD Fall to 1.2000? Join us in EURUSD Forum Related Articles: Australian Dollar Rises as RBA Signals End of Interest Rate Cuts (Euro Open) U.K. Construction Shrinks at Fastest Pace Since 1997 Euro, British Pound Not the Only Currencies Facing Major Central Bank Decisions This Week To discuss this report contact John Rivera, Currency Analyst: jrivera@fxcm.com