daily brief

Euro Pares Earlier Losses Despite Further Contraction In Manufacturing

Friday, 02 January 2009 09:54:05 GMT  |  John Rivera, Currency Analyst

The Euro started 2009 under heavy selling pressure falling to 1.3839, the lowest level in two weeks. The single currency would pare the majority of it earlier losses reaching above 1.3950 despite the final December PMI manufacturing reading being revised lower to 33.9 from a preliminary reading of 34.5.

Talking Points
• Japanese Yen: Consolidating Above 91.00
• Pound: Falls on Weak Housing Data
• Euro: Manufacturing Contracts Further
• US Dollar: ISM Manufacturing On Tap

Euro Pairs Earlier Losses Despite Further Contraction In Manufacturing

The Euro started 2009 under heavy selling pressure falling to 1.3839, the lowest level in two weeks. The single currency would pare the majority of it earlier losses reaching above 1.3950 despite the final December PMI manufacturing reading being revised lower to 33.9 from a preliminary reading of 34.5. The indicator fell from November’s print of 35.6 which was the lowest since record keeping began in 2006, adding to the growing concerns that the downturn in the region may be longer then economists initially predicted.

As manufacturing activity continues to contract and the regions labor markets continue to weaken, pressure will mount for the ECB to continue easing rates. President Trichets comments that the past three rate cuts have yet been realized by the economy shows tat the central bank is reluctant to take rates lower. In the past the MPC has expressed fear of being trapped if they take rate too low, which would leave them trapped without further recourse. Yet, the cries are mounting for more action from the central bank and another rate cut is very likely at their next policy meeting on January 15th. Therefore, we may see bearish Euro sentiment continue as interest rate expectations decline.

The Pound drop from its daily high of 1.4812 to a low of 1.45020 before consolidating as U.K. manufacturing and housing sectors showed further weakness. Indeed, mortgage approvals fell from 32,000 to 27,000, which was the lowest since record keeping began in 2002. Additionally, house prices fell another 2.2% in December according to HBOS. Meanwhile, the December PMI manufacturing reading despite unexpectedly improving to 34.9 from a record low of 34.5 the month prior, contracted for the seventh straight month. Tight credit markets continue to cripple demand which may force the BoE to take further measures to loosen lending standards. Therefore, markets are expecting a rate cut from 50-100 bops on Thursday which could lead to further Sterling weakness as we near the policy decision. .

The U.S. December ISM manufacturing indicator is expected to show a decline to 35.4 from 36.2, which would be the lowest in almost three decades. Waning domestic demand combined with sharp declines in overseas orders has led to a deep contraction in the sector. The troubles of the U.S. auto maker’s will only add to the declining activity as they are shutting plants in order to avoid bankruptcy. The dollar could weaken on the data if fundamental factors are driving price action today. Also, If equity markets continue the bullish momentum from the last day of trading ion 2008, then we may see the greenback weaken on increasing risk appetite as safe haven flows leave U.S. Treasury’s seeking higher returns abroad.

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Related Articles:

Fed And Dollar Look For Policy Alternatives To Support Growth In 2009
Forex Technical and Fundamental Exchange Rate Forecasts for January
US Dollar Index Ends 2008 Up 7% Following Year of Record High Volatility and the Collapse of Modern Finance

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

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