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Euro Holds Above 1.2800 Despite Weak PMI, Will Trichet Cut Rates?

Monday, 03 November 2008 10:02:58 GMT  |  John Rivera, Currency Analyst

The Euro held onto its earlier gains during Asian trading despite a lower revision in its final manufacturing PMI reading. The 1.2800 price level held as support after the activity gauge dropped for the fifth straight month to a record low of 41.1 from the initial read of 41.3.

Talking Points
• Japanese Yen: Consolidating Above 99.00
• Pound: Activity Improves From Record Lows
• Euro: PMI Contracts For Fifth Month
• US Dollar: ISM Manufacturing On Tap

Euro Holds Above 1.2800 Despite Weak PMI, Will Trichet Cut Rates?

The Euro held onto its earlier gains during Asian trading despite a lower revision in its final manufacturing PMI reading. The 1.2800 price level held as support after the activity gauge dropped for the fifth straight month to a record low of 41.1 from the initial read of 41.3. Output fell to 39.8 from 44.1 with new orders holding at 36.2 due to a drop in global demand and a domestic economy entering a recession.

The reading for Germany-the region’s largest economy- led the way as the headline print dropped to 42.9 from 43.3 with new orders slipping to 39.2 from 39.3. The region is clearly headed to a recession as the EU commission has reduced its growth expectations to 0.1% for 2009 and to 1.2% in 2008 as contraction in the fourth quarter is anticipated to drag the annualized numbers lower. The ECB is expected to cut rates by 50 bps on November 6th at their policy meeting as the diminishing threat of price pressures have given the central back the green light to continue easing. Indeed, the PMI input price component showed costs easing to 51.4 in October which is a significant drop from the 63.3 reading that we saw in August. Credit Suisse overnight index swaps are pricing in 128 bps of rate cuts over the next twelve months which indicates that the MPC may continue easing into 2009. The EURUSD has been trading in a tight range between 1.2700 and 1.2900 and may remain range bound until the rate decision and President Trichet’s subsequent remarks.

The Pound pared earlier gains falling to 1.6200 after a test of 1.6400 despite an improvement in manufacturing activity. The U.K. October manufacturing PMI indicator unexpectedly improved to 41.5 from a revised 41.2 .However, the reading is only a slight improvement from the previous month’s record low and although there were improvements in new orders the outlook remains bleak for the economy. The BoE has all but guaranteed a 50 bps point cut with rhetoric from various members over the past week led by David Blanchflower, the question for forex traders is whether the central bank will look to surprise markets with a more aggressive 100 bps reduction. The increasing expectations of deeper easing could weigh on the Pound leading up to the policy meeting.

The dollar after its strongest month in seventeen years started November with some signs of weakness as risk appetite continues to grow. There are several story lines that will play out over a week that may determine the near-term course of the greenback. Rate decisions by the RBA, ECB and BoE, a U.S. presidential election and an expected 180,000 decline in non-farm payrolls may add up to a volatile week of price action. Today’s economic calendar will also present event risk in the U.S. ISM manufacturing report. Activity is expected to decline to 42.0 from 43.5, but we may see a more pronounced contraction with the New York, Philadelphia and Chicago regional readings falling sharply. Although, risk sentiment may continue to dictate price action, the declining interest rate expectations in Europe may add support fro the dollar. However, the deteriorating fundamental picture for the U.S. may weaken the argument that the American economy may be the first to emerge from the credit crisis which could weigh on the dollar.


Will The EUR/USD Fall to 1.2000? Join us in EURUSD Forum

Related Articles:
EU Commission Lowers Growth Forecasts, Raising Risks of a Recession
Forex Trading Weekly Forecast - 11.03.08
5 Key Events for the Forex Market This Week 11-02-08

To discuss this report contact John Rivera, Currency Analyst: jrivera@fxcm.com

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