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Euro Weakens On Failed U.S. Auto Bailout and A 15 Year Low In Industrial Production

Friday, 12 December 2008 10:01:36 GMT  |  John Rivera, Currency Analyst

The Euro started to pare its losses resulting from the announcement of the failed Detroit bailout plan. However, a weaker than expected October industrial production report would derail the bullish momentum as the 1.2% decline in activity signaled that the region’s downturn could steepen.

Talking Points
• Japanese Yen: Falls To 13 Year Low
• Pound: Back Below 1.5000
• Euro: Industrial Production Falls Most In 15 Years.
• US Dollar: Retail Sales, PPI and Consumer Confidence On Tap

Euro Weakens On Failed U.S. Auto Bailout and A 15 Year Low In Industrial Production.

The Euro started to pare its losses resulting from the announcement of the failed Detroit bailout plan. However, a weaker than expected October industrial production report would derail the bullish momentum as the 1.2% decline in activity signaled that the region’s downturn could steepen. The monthly drop was the largest in 15 years and dragged the annualized reading down to minus 5.3% from minus 2.7%. The region also saw French business confidence fall to a 28 year low of 68 from 75 the month prior. The single currency was threatening the 1.400 price level before weakening which may now serve as a significant resistance level, where previous resistance at 1.300 could turn into support.

The fall in activity was lead by a 2.0% decline in intermediate gods which accounts fro 36.2% of total output. The medium term outlook for the region’s economy remains dim which has led to expectations that the ECB will need to continue their current easing policy. Therefore, the Euro’s recent strength may be limited as markets continue to expect the central bank will cut rates by at least another 100 bps. Therefore, current strength may present a good opportunity to sell the currency if it fails to break above 1.4000

The Yen fell to a 13 year low on the failure of the U.S. auto bailout plan as concerns that the industry’s failure would deepen the global recession. Safe-haven flows would drive the USD/JPY to as low as 88.18. However, we saw an immediate retrace that has the pair back above 90.00. If the carmakers troubles continue to go unaddressed we may see weakness continue and another test of 88.00 is a possibility.

The Pound fell back below 1.500 on the back of the flight to safety, falling to as low as 1.4852. The Sterling has since paired some of its loses but failed to break above the psychological barrier which has served as solid resistance before yesterday’s cable strength. The Pound will have to navigate a significant amount of event risk as BoE minutes may reveal that the central bank plans to continue their easing policy, while consumer prices, employment and retail sales are all expected to weaken strengthening the case for further easing. Therefore, the Pound’s upside potential may be limited and a drop back to 1.4500 is a distinct possibility.

The failure of the auto bailout plan in the U.S. Senate has sparked risk aversion which may be a supportive factor for the dollar throughout the day. A slew of economic data is also scheduled to cross the wires today including U.S. retail sales, producer prices and consumer confidence reports. The declining expectations for growth and the troubles of Detroit are expected to drag sentiment to a new 28 year low of 54.8. Pessimistic Americans have continued to tighten their wallets despite the start of the holiday shopping season as U.S. retails sales are forecasted to have declined another 2% in November following a record drop of 2.8% the month prior. The dour data will only fuel fears that the current global slowdown will deepen which may perpetuate the current flight to safety. However, as traders realized that there are other measures available to help the troubled carmakers including using funds from the TARP, fears have eased and the dollar has weakened. However, when U.S. trading session begins we could see increased safe-haven flows as they react to the bailout failure.

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Related Articles:

Declining U.S. Retail Sales Would Validate Bullish EUR/USD Technical Outlook
US Dollar Declines May Continue as US Retail Sales are Expected to Fall for 5th Straight Month
Euro-Zone Industrial Production Hits 15-Year Low as Demands Falter

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

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