eur fundamentals

Euro-US Dollar Surges on Bigger Than Expected Drop in US CPI, Only to Drop on Risk Aversion

Wednesday, 19 November 2008 23:55:10 GMT  |  Terri Belkas, Currency Strategist

The US dollar initially weakened versus the euro upon the release of US inflation figures, only to rebound  in the afternoon as dim prospects for an auto industry bailout lead stocks lower and boosted demand for safe-haven assets.

Looking at the data on hand, the Consumer Price Index (CPI) plunged 1 percent in October, marking the sharpest decline on record, while the core CPI, which excludes food and energy prices, unexpectedly fell for the first time since 1982. Overall, the figures suggest that the Federal Reserve has room to continue cutting interest rates, since the greatest risks for price growth are likely to the downside. The afternoon release of the minutes from the Federal Open Market Committee’s (FOMC) October 28-29 supported this outlook, as the Committee predicted that the economy will contract through mid-2009. Furthermore, some FOMC members “suggested that additional policy easing could well be appropriate at future meetings,” and that they “agreed to take whatever steps were necessary to support the recovery.'' As a result, fed fund futures are signaling more aggressive rate cuts during the Federal Reserve’s December meeting, as they are fully pricing in a cut from 1.00 percent to 0.50 percent, and a 20 percent chance of a cut to 0.25 percent.

Economic data due to be released on Thursday may exacerbate this sentiment, as initial jobless claims are forecasted to hold near 7-year highs of 505K while continuing jobless claims are expected to rise to a fresh 26-year high of 3900K. Increasing claims for unemployment benefits are bound to push the unemployment rate higher, which is already at a 14-year high of 6.5 percent. Later in the morning, the Federal Reserve Bank of Philadelphia's index of business activity is expected to rise very slightly to a reading of -35 from an 18-year low of -37.5 in October. Nevertheless, a reading below zero still suggests that the manufacturing sector is contracting, and given the drop in the New York Fed's "Empire" manufacturing index to a record low during the same period, there is little hope that the Philly Fed report will be surprisingly strong. Overall, this data should work in favor of additional dollar strength, as disappointing reports tend to spark flight-to-quality.

Related Articles: US Dollar Weekly Forecast, US Dollar Trading Ranges Could Break Amidst US, UK, Canadian Event Risk, Euro Weekly Forecast

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