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Euro Finds Support Ahead Of Non-Farm Payrolls and Congress Vote on Bailout

Friday, 03 October 2008 10:06:42 GMT  |  John Rivera, Currency Analyst

The Euro has begun to find a bid tone after a failed test of 1.3800 during Asian trading as major event risk looms for the dollar. The EURUSD was above 1.3880 as Eurozone retail sales printed a gain of 3% which was higher than the 1% expected by economists.

Talking Points
• Japanese Yen: Trading Choppy Ahead OF Bailout Vote
• Pound: Service Sector Deteriorates to Worse On Record
• Euro: Retail Sales Rebound
• US Dollar: Bailout Plan And Job Data To Impact Sentiment

Euro Finds Support Ahead Of Non-Farm Payrolls and Congress Vote on Bailout.

The Euro has begun to find a bid tone after a failed test of 1.3800 during Asian trading as major event risk looms for the dollar. The EURUSD was above 1.3880 as Eurozone retail sales printed a gain of 3% which was higher than the 1% expected by economists. Also, July’s initially reported decline of 0.4% was revised to a gain of 1% giving hope that the region’s economy may not be declining as fast as expected.

The European Central Bank’s keep rates on hold at yesterday’s policy meeting, but President Trichet was as dovish as he has ever been when he stated "With the weakening of demand, upside risks to price stability have diminished somewhat, but they have not disappeared,". The ECB leader stated that the committee debated cutting rates as the downside risk to the economy have increased amidst the current credit crisis. The door has been opened for a rate cut as the MPC likes to telegraph its future policy actions. Therefore, a rate reduction may come at anytime and following this weekend’s European G8 meeting, we may see a cry for easing from European leaders. The declining interest rate expectations will continue to weigh on the unified currency as markets are pricing in over a 100 bps worth of cuts over the next twelve months.

The Pound has also found some support as the looming event risk has weigh on the dollar despite further evidence that the country may already be in a recession. The Service PMI reading contracted the most in at least 12 years as the 46.0 reading was the lowest since the series began and significantly lower than the August reading of 49.2. The sector which accounts for %70 of the economy’s growth remained in contraction for the fifth consecutive month. The sector may continue to deteriorate as the new business component lead the overall index lower as it fell from 47.1 to 45.2. The impact of the credit crunch show its ugly head in the BoE equity withdrawal reading as it declined fro the first time in 10 years. Home owners who have seen home values continue to decline and that availability if credit dry up stop pulling cash from their main asset. The drop signals that domestic demand will remain weak as the indicator is a measure of future consumption of big ticket items like cars. The BoE is now expected to cut rates by 25 bps at their policy meeting next week. Indeed, credit Suisse overnight index swaps are pricing in a 138 bps worth of cuts over the next 12 months, which is the most since the product was created. Therefore, we may see the pound look to test 1.7500 before the MPC meeting.

The U.S. will have a day of major event risk with the bill for the rescue plan headed to the House of Representatives where it was initially defeated. The revised version is expected to pass as enough measures were added to garner the needed votes. Additionally, the Non-farm payroll report is expected to show the economy lost another 105,000 jobs and declined for a ninth straight month. The dour report is expected to push voters who are on the fence toward passing the bill that will deliver over $700 bln to the cash starved markets. The labor report could be worse than expected giving how much the leading indicators have deteriorated. Indeed, the employment component of the ISM manufacturing report fell to its lowest level since April 2003, jobless claims were over 400,000 for the eleventh straight week and the challenger job indicator rose for the seventh consecutive month. We may see the dollar weaken on the release as the prospects of the US entering a recession increases. However, the approval of the bailout plan would enhance the outlook as it could potentially lubricate credit markets and ultimately bring an end to the decline of the housing slump.


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