daily brief

Euro Falls as Easing Inflation Lowers Interest Rate Expectations

Friday, 28 November 2008 10:01:39 GMT  |  John Rivera, Currency Analyst

The Euro fell over 100 bps as easing inflation numbers increased the potential for more easing from the ECB. The single currency would reach as high as 1.2960 before French producer prices hit the wires showing a 0.9% decline in October.

Talking Points
• Japanese Yen: Consolidating Above 95.20
• Pound: Home Found Support at 1.5360
• Euro: Weakens On Easing Inflation
• US Dollar: Risk “Black Friday” May Impact Sentiment

Euro Falls as Easing Inflation Lowers Interest Rate Expectations

The Euro fell over 100 bps as easing inflation numbers increased the potential for more easing from the ECB. The single currency would reach as high as 1.2960 before French producer prices hit the wires showing a 0.9% decline in October, which dragged the annualized rate to 4.3% from 6.0%. The disinflation story didn’t end there as Italian PPI showed its largest monthly drop since 1991 falling 1.5%, and CPI fell to 2.7% from 3.5% in October. This would lead to the EZ CPI estimate dropping to 2.1% from 3.2% which would bring it just above the central bank’s 2% target.

The Euro-zone economy continues to slow and with unemployment rising to 7.7% from 7.5% the prospect for domestic growth is dimming. The dissipating price pressures has opened the door for more easing from the ECB which is expected to cut rate by at least 50 bps at their next policy meeting. However, markets are starting to call for a 100 bps reduction which they may not receive as the central bank has given every indication that it will continue with its measured approach. Nevertheless, the sharp fall in prices may raise deflation concerns and lead the MPC to consider aggressive rate reductions as a prudent measure to eliminate the downside risks to prices. Therefore, until we get a clearer picture on the ECB’s intentions, the EUR/USD may continue to trade in its current 1.2400 – 1.3000 range.

The Pound slipped nearly 100 bps during the European trading session before finding support at 1.5360. The Sterling had been range bound with the light U.S. holiday trading volume but the Sterling has seen volatility pick up as U.S. traders start to return. Expectations of more aggressive easing from the BoE continues to limit upside potential and after failing to break 1.5500 twice we could see the Cable trade lower leading up to the central bank’s next rate decision.

A short trading day following the Thanksgiving Day holiday and an empty economic calendar could lead to another day of low volume trading and limited volatility. However, we saw during European trading that markets were beginning to trade on fundamentals again which could impact dollar price action. Today kicks off the holiday shopping season with “Black Friday” and U.S. retailers have already showed their hands with early opening times paired with severe discounting. If early reports showed that shoppers stayed home, the lower expectations for domestic growth could lead to dollar weakness. However, if the lack of consumer consumption sinks equity markets then risk aversion flows may lend dollar support.

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

Related Articles:
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Currency Markets Continue to Move With Dow Jones, Oil, Gold

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

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