The Euro fell to 1.3850 before finding support as the U.S.Senate approved the bailout plan. Profit taking has pushed the EURUSD back above 1.3900 despite easing inflation. Prices at the factory gate slowed to 8.5% from an 18 year high of 9.2% on declining oil prices.
Talking Points • Japanese Yen: Falls To 105.30 As Risk Aversion Set In • Pound: Credit Markets Deteriorate Further • Euro: Tests 1.3850, ECB Rate Decision Ahead • US Dollar: Bailout Plan And Job Data To Impact Sentiment Euro Falls On Senate Approval Of Bail Out Plan, Will Easing Inflation Lead To An ECB Rate Cut? The Euro fell to 1.3850 before finding support as the U.S.Senate approved the bailout plan. Profit taking has pushed the EURUSD back above 1.3900 despite easing inflation. Prices at the factory gate slowed to 8.5% from an 18 year high of 9.2% on declining oil prices. Indeed, energy costs fell 2.5%, but costs ex-energy slightly eased to 4.3% from 4.4%. Despite the drop in headline inflation, core prices remain elevated enough to possible keep the ECB on hold for another month. The European Central Bank’s is expected to keep rates on hold at their upcoming interest rate decision today at 7:45 EST. Of course the real drama welcome when President Trichet speaks following the release, unless they unexpectedly surprise with a rate reduction. Although, the MPC is mandated to focus on price stability it is evident that their last rate increase was crippling to the economy given the already tight credit markets. Therefore, the reversal of that increase is still a possibility giving the extreme conditions that exist. However, unless the laws are changed by which the central bank operates, then inflation at 3.8% will keep policy makers from taking any action. The most Euro bears can hope for is a dovish Trichet, who is expected to show greater concern for slowing growth which could lead to further EURUSD losses. Considering that the European G8 leaders are scheduled to have a meeting this Saturday to discuss the declining growth in the region and the current credit crisis, we could see a call for a change in philosophy which could lead to a rate reduction in the near term. The Pound would also weaken on the news from the U.S. eventually finding support at the 1.7600 price level. The Sterling wouldn’t see losses similar to the Euro as the potential unsticking of the credit markets will have a significant benefit to its struggling housing market. Indeed, home prices realized their biggest drop since 1991 as borrowers continued to find it difficult to secure financing leaving a glut of inventory. Today's BoE Q3 credit survey showed that conditions are expected to tighten further in Q4, as corporate credit availability was weaker than expected. Meanwhile, households' demand for secured borrowing fell, a situation which is likely to get increasing worse. Declining credit availability will weigh on an already slowing economy, increasing the downside risks to growth. The Japanese Yen was one of the few currencies to gain against the dollar on the news of the Bailout approval signaling that despite the much needed help, risk aversion is still prevalent in the market. We could see the USDJPY continue to fall as the upcoming labor data is expected to show that the U.S. economy is moving closer to a recession. The passing of the rescue plan by a sound 74-25 vote should add dollar and the fact it contains two provisions favored by House Republicans should lead to its ultimate passing. The added measures which include raising the limit on federal bank-deposit insurance and the reiteration of the authority of securities regulators to suspend asset-valuing rules that corporate executives blame for fueling the crisis should ease fears and help move credit markets toward a normal environment. The dollar rally on the news as the $700 billion dollar bailout may finally put an end to the credit crisis. However, the economic calendar is expected to generate bearish sentiment as jobless claims are expected to remain above 400,000 for the 11th straight week, which is indicative of recessionary periods. The economy continues to lose jobs with the recent consolidation of the financial sector more are expected, which could lead to a dismal Non-Farm payroll report, which is the next major event risk that markets will focus on. This may lead to dollar weakness after traders finish pricing in the impact of the rescue plan. Will The EUR/USD Fall to 1.4000? Join us in EURUSD Forum Related Articles: Dollar Could Be Troubled By Rate Cuts Even IF Bailout Goes Through.