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Euro's Momentum Derailed by Dour Manufacturing Report, Has Trichet Dropped the Ball?

Friday, 07 November 2008 10:25:34 GMT  |  John Rivera, Currency Analyst

The Euro rebounded form a low of 1.2652 soaring to as high as 1.2850 erasing losses following the ECB rate cut. A slew of German fundamental data gave mixed signals as exports rose while manufacturing activity dropped.

Talking Points
• Japanese Yen: Consolidating Above 97.20
• Pound: Rebounds On Improved Outlook
• Euro: Industrial Production Falls Most Since 2003
• US Dollar: Non-Farm Payrolls On Tap

Euro’s Momentum Derailed by Dour Manufacturing Report, Has Trichet Dropped the Ball?

The Euro rebounded form a low of 1.2652 soaring to as high as 1.2850 erasing losses following the ECB rate cut. A slew of German fundamental data gave mixed signals as exports rose while manufacturing activity dropped. The German trade surplus widened to 15.0 Billion from 10.6 billion as foreign demand increased on the back of a weakening Euro. However, the lagging September numbers don’t reflect the financial turbulence seen in October and the expected slump in the global economy will weigh on demand. Additionally, industrial production sharply fell -2.1% in September from 1.6% the month prior, which was the biggest drop since August, 2003.A 7.1% drop in durable goods demonstrates the retrenchment of businesses and consumers which will continue to drag the economy into a recession. The dour report would end the Euro’s momentum and send it back below 1.2800.

The ECB has been the least aggressive central bank as it only cut rates by the expected 50 bps. Given President’s Trichet Statement 'I don't exclude that we could decrease rates again. Again, we are not pre-committed in any respect, we'll do whatever is necessary to take into account the situation as it will unfold progressively.', the central bank will maintain its deliberate approach and focus on price stability threaten to sink the Euro- Zone economy further. The calls are growing for the central bank to become more aggressive and markets are pricing in another 143 bps of rate cuts over the next twelve months. Therefore, despite the recent support the single currency has been receiving and may continue to in the near-term ahead of weak U.S. fundamentals

The Pound bounced from a low of 1.5535 during Asian trading and has broken above the 1.58000 price level. After an initial bullish reaction to the BoE’s surprise 150 bps rate cut the Sterling would sell off during the remainder of the U.S. session. Bearish dollar sentiment and increasing hope that the U.K. economy may stabilize following the central bank’s efforts have been supportive factors. Despite the size of the central bank’s easing, Credit Suisse Overnight Index Swaps are still calling for another 224 bps of cuts over the next twelve months. Consensus is growing that the MPC will have to ultimately follow the Fed’s lead and bring their benchmark rate to as low as 1%. The GBP/USD appears to be trading in a tight range between 1.5500 and 1.6000, but the declining interest rate outlook may send the Pound lower in the medium term.

Non-farm payrolls will present major event risk for the U.S. dollar today as economists are expecting a loss of 200,000 jobs. It would be the tenth month of losses and the largest reduction in employment since March, 2003. Leading indicators have pointed to a greater than expected loss as ADP reported a 157,000 loss in private jobs and the employment component of the service sector dropped to 41.5 from 44.2. U.S. fundamentals haven’t had their traditional impact on the dollar as risk winds have dominated price action. However, the labor report may re-focus traders on the evidence that the U.S. economy is heading into a recession and lead to dollar weakness. Also, President elect Barack Obama is expected to meet with his financial advisors and will hold a press conference following the meeting. The potential exists that the outline for additional measures including the possibility of a second fiscal stimulus plan will be presented. The announcement could spark dollar bullish sentiment as the outlook for the U.S. to be the first to emerge from the credit crisis will improve.

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

Related Articles:

U.K. Banks Remain Hesitant to Lower Mortgage Rates, Stoking Bets For Additional Rate Cuts by the BoE

How Much Does the US Dollar Forecast Depend on Non-Farm Payrolls?


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

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