Euro Falls as German Labor Market Weakens And Trichet Signals More Rate Cuts

Talking Points
• Japanese Yen: Strengthens On Risk Aversion Flows
• Pound: Bounces From Support At 1.4100
• Euro: Lower in Higher German Unemployment
• US Dollar: Durable Goods On Tap

Euro Falls as German Labor Market Weakens And Trichet Signals More Rate Cuts

The Euro dropped below 1.3050 as German unemployment rose by nearly twice as much as the 30,000 forecasted. The German economy saw another 56,000 added to the unemployment rolls following 18,000 the month prior, which led to the unemployment rate rising 7.8%. The fundamental story for the country would grow dimmer as retail PMI fell to 41.7 from 42.3. However, the indicator for the Euro-Zone surprising showed an improvement to 44.0 from 41.4 led by gains in France. The rest of the data for the economic region wasn’t as bullish with sentiment reading deteriorating or remaining flat led by economic confidence falling to a record low of 68.9 from 70.4.

The Euro was also weighed by a CNN report that ECB President Trichet stated that he hasn’t excluded a move below 2%, which lowered expectations that the central bank will pause at its next policy meeting. Indeed, just yesterday in Davos, Switzerland where the World Economic Conference is meeting, the central bank leader reiterated his stance that March was the decision to focus on. Despite the report is more likely that the MPC will refrain from further easing as they try and assess the impact of past actions and maintain their measured approach. Nevertheless, the deteriorating fundamental data from the region will increase the likelihood that future easing is in store and may continue to weigh on the single currency.

The British pound fell below 1.4100 before it bounced from support back above 1.4200. Risk aversion flows had weighed on the sterling temporarily stalling its recent bullish momentum. The pound rallied over 900 pips after hitting a 23 year low and appears poised to add to its gins after shaking off recent bearish sentiment. U.K. stocks have come off their session low which is adding support. We may see risk appetite return by the end of the day if markets start to focus more on the impact of the measures to stabilize the banking system and the prospect of future rather than the current global downturn.

Yesterday, the Fed signaled that it’s moving closer to buying long-term Treasuries and expanding its $600 billion program to buy home-finance debt. Chairman Bernanke would also warn of that the global economy is at risk of deflation and that their prediction of gradually growth at the end of the year is at risk. The dour comments fueled demand for U.S. Treasury’s, which has been a supportive factor for the dollar. The comments dampened optimism that was generated by the prospect of the creation of a “bad bank” by the U.S. government to remove toxic assets from banks balance sheets. Today’s economic calendar may add to risk aversion as December U.S. durable goods orders are expected to have fallen by 2.0% as consumers and businesses have continued to retrench in the face of a deepening recession. Initial jobless claims are expected to be above 500,000 for another week adding to the dimming hopes for domestic growth. Yet, as I mentioned above if markets turn their focus ahead on the impact of future stimulus and bank stability, we could see the dollar weaken on risk appetite.

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Related Articles:
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German Unemployment Rises as the Financial Crisis Drags on the Real Economy

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