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Euro And Pound Drop On Declining Investor Confidence and Easing Inflation; GSE's Takeover Sparks Mixed Reaction.

Monday, 08 September 2008 10:11:48 GMT  |  John Rivera, Currency Analyst

The Euro failed to break support at 1.4200 again after a drop in investor confidence. Concern generated by the Fannie Mae and Freddie Mac takeover would push the EURUSD as high as 1.4430 during Asian trading before the pair nosedived as traders tried to decipher its potential impact.

 

  

·          Japanese Yen: USDJPY Failed At 109.00

·          Pound: Producer Prices Fall The Most in 22 Years

·          Euro: Tests Support At 1.4200 as Investor Confidence Drops

·          US Dollar: Fannie and Freddie Bailout

 

Euro And Pound Drop On Declining Investor Confidence and Easing Inflation;  GSE ‘s Takeover Sparks Mixed Reaction.

 

The Euro failed to break support at 1.4200 again after a drop in investor confidence. Concern generated by the Fannie Mae and Freddie Mac takeover would push the EURUSD as high as 1.4430 during Asian trading before the pair nosedived as traders tried to decipher its potential impact. The already soft Euro was pushed lower as the Sentix investor confidence reading fell to -20.2 from -15.3 in August. The current situation component sharply fell to -12.00 from 0.0 as lingering credit concerns and a declining economy soured sentiment. 

 

The declining confidence in the Euro-zone has sunk the single currency to its lowest levels since October.2007. However, a second failed attempt at breaking the 1.4200 price level could set the EURUSD for a move higher. Although it is clear that the European economy is contraction faster than policy makers had initial anticipated, the ECB’s has yet to give any clear signs that easing may be in their future. Many expect that the MPC will need to cut rates in early 2009, but President Trichet staunch adherence to his price stability mandate may refrain from easing as long as possible.

 

U.K. producer prices unexpectedly dropped the most in 22 years on lower oil prices and declining raw material costs, which added to the Sterling’s weakness. The Pound saw similar price action as the Euro with initial strength giving way to profound weakness, leading to a fall of over 300 bps during overnight trading. Prices at the factory gate fell 0.6% in August pulling the annualized rate to 9.7%. Meanwhile, input costs fell 2.0% following a 1.4% decline in July, which may signal that price pressures may continue to ease. If factories pass on the lower costs to consumers, which may not be the case as they were already seeing their margins get squeezed, then it may open the door for the BoE to cut rates by the end of the year as they try and stave off a recession. The Cable appears to be headed to test support at 1.7550 as potential easing increases.

 

A empty economic calendar will leave the dollar price action subject to the ongoing interpretation of the potential impact of the U.S. government takeover of Fannie Mae and Freddie Mac. Although the greenback gained against the Sterling and Euro overnight, weakness against the Yen shows that the move has sparked concerns that the move is a sign that the U.S. financial sector has more cracks to be revealed. Yet, equity traders in Asian and Europe applauded the move as all the major indices soared on the news and a similar reaction in U.S. markets could set the greenback up for further strengthening.

 

Will The EUR/USD Break 1.4000?  Join us in EURUSD Forum

 

For More Fundamental Analysis, Check Out Our Other Daily Reports.

 

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