Euro Finds Support As German Investor Confidence Unexpectedly Rises

Talking Points
• Japanese Yen: Economy Shrunk Faster Than Expected
• Pound: Manufacturing Grinds To A Halt
• Euro: German Investor Confidence Rises
• Canadian Dollar: BoC Rate Decision Ahead
• US Dollar: Pending Home Sales On Tap

Euro Finds Support As German Investor Confidence Unexpectedly Rises.

The Euro found support after the German ZEW survey outlook reading unexpectedly rose to -45.2 from -53.5 as aggressive easing from the ECB has boost investor’s optimism. The single currency was trading heavy ahead of the release falling to as low as 1.2826 as traders were expecting a dismal reading. Despite, the improved outlook for the future the drop to -64.5 from -50.4 in the current situation assessment demonstrates how dire things currently are in Europe’s largest economy. Therefore, traders are expecting the central bank will need to continue their current easing policy which may limit upside potential for the Euro.

U.K. industrial production dropped 1.7% in October which was more than triple the 0.5% forecast from economists and the lowest since January 2003. The Pound would find support after the release at 1.4740 as traders sold the rumor and bought the news. The drop in activity was lead by a 4.0% decline in durable goods and a 4.2% fall in metals demonstrating the impact of the global slowdown. Despite, the BoE cutting rates by 250 bps over the past month, markets are still looking for another 45 bps in cuts. Bullish momentum may be limited as resistance lies ahead at the 20-day SMA which has held firm the past few months. The Sterling appears to be trading more on technicals than fundamental data which could lead to a re-test of 1.4500 if it fails at resistance.

The BoC is expected to cut their benchmark rate by 50 bps today as the downside risks to the Canadian economy have accelerated on the back of declining commodity prices and sinking demand from the U.S. Indeed, the past week we saw the economy give back 70,600 jobs in November and manufacturing activity fall to a record low of 40.20 according the IVEY PMI gauge. Additionally, housing starts falling to the lowest level since 2001 demonstrate that the credit crisis is affecting lending which had remained relatively strong. A deeper than expected cut is a strong possibility given the aggressive moves by the BoE and ECB as all central banks appear to be headed toward a ZIRP. 1.3000 has held as strong resistance for the USD/CAD, a break above here could lead to a significant move higher.

The bullish momentum from Wall St yesterday hasn’t found its way overseas as Asian and European markets were tepid. The lack of risk appetite has added dollar support through the overnight sessions which may continue throughout the day. The U.S. pending home sales report may fuel the flight to safety as expectations are that October saw a 3.0% decline after a 4.6% drop the month prior. The failure of the housing market to bottom despite the measures taken by the U.S. government and Fed remains an albatross for the economy and a worry for investors. The potential bailout of the U.S. automakers continues to move forward which could spark risk appetite which would weigh on the dollar.

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