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Euro, Pound Consolidates as Fundamentals Disappoint

Thursday, 27 November 2008 09:41:43 GMT  |  David Song, Currency Analyst

The euro pared gains after reaching a high of 1.2969 during the European trading session as economic confidence in the Euro-Zone slipped to a 15 year low in November. The considerable drop in sentiment suggests that conditions are deteriorating at a faster pace throughout the second half of the year, which may only get worse in 2009 as the economy heads into a recession.

Talking Points
• Japanese Yen: Pulls Back to Hold Above 95.00
• Pound: Home Prices Continue to Fall
• Euro: Confidence Weakens Further
• US Dollar: Risk Trends to Dictate Price Action

Euro, Pound Consolidates as Fundamentals Disappoint

The euro pared gains after reaching a high of 1.2969 during the European trading session as economic confidence in the Euro-Zone slipped to a 15 year low in November. The considerable drop in sentiment suggests that conditions are deteriorating at a faster pace throughout the second half of the year, which may only get worse in 2009 as the economy heads into a recession.

Economic confidence in the Euro-Zone slipped to 15 year low of 74.9 from 80.0 in October, while business confidence fell to lowest level since 1993 as the index dropped to -2.14 from -1.34. In addition, the retail PMI reading for the Euro-Zone fell at a record pace in November as the index slipped to 41 from 44 in October. Furthermore, the PMI release for Germany contracted for the sixth consecutive month as the index plunged to a record low reading of 41.3 from 46.7. Meanwhile on a lighter note, the German labor market improved more than expected as the number of unemployed workers fell another 10K in November, following a 26K decline in the previous month. The remarkable improvement helped to keep the jobless rate unchanged at a 16 year low of 7.5% however; employment opportunities may deteriorate over the coming months as Europe’s largest economy heads into its worse recession in 12 years.

The British pound followed suit as it pulled back from an intraday high of 1.5500, and may fall further over the week as deteriorating fundamentals continues to reflect a dour outlook for Europe’s second largest economy. The Nationwide home price index fell for the 13th consecutive month as it dropped 0.4% in November, and may fall further over the coming months as credit conditions remain far from normal. Moreover, Credit Suisse overnight index swaps are showing that investors expect the Bank of England to lower the benchmark interest rate by at least 125bp over the next 12 months, and may continue to ease policy further well into the next year as Europe’s second largest economy heads into a recession for the first time since 1991.

The Thanksgiving holiday paired with an empty U.S. calendar will leave the dollar at the mercy of risk trends, and may face increased volatility over the remainder of the trading session amid the drop in trading volume. Increased correlation between the forex and global equities market could weigh on the greenback as the stock markets in Asia and Europe continue to push higher this week, and may face increased selling pressures as investors begin to feed their appetite for risk.

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