daily brief

Euro, Pound Drop As U.S. Bailout Approval Boosts Dollar, What's Trichet's Move?

Monday, 29 September 2008 10:11:16 GMT  |  John Rivera, Currency Analyst

The Euro would fall as low as 1.4324 as the White House and congressional leaders in the U.S. agreed upon a deal to authorize the biggest bailout in U.S. history. The Euro is finding support at the 20 Day SMA despite economic indicators continuing to show that the European economy continues to soften.

Talking Points
• Japanese Yen: Consolidating As Bailout Fails To Spark Risk Appetite
• Pound: Sinks As Banking Concerns Mount, As Branford & Bingley Nationalized
• Euro: Retail and Consumer Confidence Fall
• US Dollar: Bailout Fallout and Personal Spending and Income on Tap

Euro, Pound Drop As U.S. Bailout Approval Boosts Dollar, What’s Trichet’s Move?

The Euro would fall as low as 1.4324 as the White House and congressional leaders in the U.S. agreed upon a deal to authorize the biggest bailout in U.S. history. The Euro is finding support at the 20 Day SMA despite economic indicators continuing to show that the European economy continues to soften. Eurozone retail PMI contracted for a fourth straight month falling to 46.2 from 47.7. Meanwhile, sentiment in the region fell to its lowest level since the Sept 11 terrorist attacks, dropping to 87.7 from 88.5

The financial crisis is now filtering through to Europe as Dutch bank Fortis was bailout by the Netherlands, Luxembourg, and Belgium. The German government had to bailout Hypo Real Estate, Germany’s second largest real estate lender leading to its shares dropping 73% in early trading. Speculation is mounting that a concerted European bailout may be needed as the focus shifts toward other banks. The softening economy and the growing credit market woes may force the ECB to come off of its price stability focus at the central bank’s next policy meeting on Thursday Oct. 2. Although we don’t expect Trichet to cut rates, he could start to signal that a future rate cut is imminent. Indeed, credit Suisse overnight index swaps are now pricing in 80 bps of rate reductions over the next 12 months which is a dramatic jump from a week ago where it stood at 23 bps.

The Pound saw similar price action as the Euro as the U.S. bailout saw it drop to 1.7961 where it also found support near the 20 Day SMA. The U.K. saw the government step in and nationalize Bradford & Bingley, the U.K’s largest lender to landlords. It was the second bank that the government had to take control of in the past year after Northern Rock’s takeover in early in the credit crisis. The British housing market continues to suffer from tight lending standards as mortgage approvals fell to the lowest on record at 32,000. The BoE may be forced to lower interest rates at their next meeting as the central bank’s efforts to provide liquidity have failed to unstuck credit markets given the worldwide problems. The slumping housing sector will remain an albatross on the economy until prices borrowers can get needed financing and prices stabilize.

The USDJPY has continued to consolidate in the 106.10-106.40 range as the U.S. bailout has failed to spark risk appetite as concerns have grown that the plan is a little too late to prevent a global recession. The 700 billion dollar proposed bailout will allow the government to buy the toxic assets off of troubled banks balance sheets. The Treasury will have 30-45 days to develop a plan to carry out the proposed actions which may keep markets on hold until they see the actual time table for the various forms of the plans. The dollar should continue to find support as Europe begins to realize the effects of the financial crisis. An expected rebound in personal income will also ad to the dollar bullish sentiment as a resilient consumer will help the economy avoid a recession.

Will The EUR/USD Fall to 1.4000? Join us in EURUSD Forum


Related Articles:
Forex Weekly Trading Forecast 09.29

Resources

• free demo account
• forex courses
• open an account
• forex stream
• free webinars