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Euro Consolidates Gains, Risk Trends to Continue Driving Forex Trading (Euro Open)

Tuesday, 25 November 2008 04:09:31 GMT  |  Ilya Spivak, Currency Analyst

The Euro and the British Pound pulled back from the highs seen in US trading as risk appetite rebounded following US authorities’ rescue of Citigroup Inc. Grim European fundamentals are unlikely to stir prices in the upcoming session, with forex traders looking ahead to the implications of the US GDP release.

Key Overnight Developments

• New Zealand Year-Out Inflation Expectations See First Fall in 18 Months
• Japan’s Corporate Service Prices Lowest in 5 Years
• Euro, British Pound Pull Back from NY Session Highs


Critical Levels



The Euro pulled back from the US session high at 1.2948 in overnight trading, slipping below the 1.29 mark to test resistance-turned-support at 1.2809, the 11/19 high. The British Pound followed suit, testing the 1.51 level. Both European currencies raced higher yesterday as risk appetite rebounded after US authorities stepped in to rescue banking giant Citigroup Inc.


Asia Session Highlights



Signs of global economic slowdown were clearly on display in the economic releases out in Asian trading hours. Japan’s Corporate Service Price index registered at -1.4% in October, the worst reading in over 5 years.

New Zealand’s 2-Year Inflation Expectation predicted annualized inflation would slow to 2.8% looking one year ahead from the fourth quarter, the first decline in 18 months. The metric predicted consumer prices would slow to 0.5% in the three months through December, the lowest in over a year. Still, traders are pricing in a 1.25% rate cut from the Reserve Bank of New Zealand at the bank’s next meeting and a total of 225 basis points in cuts over the next 12 months.


Euro Session: What to Expect



The final revision of Germany’s third-quarter Gross Domestic Product figure is set to support initial estimates saying that the Euro Zone’s largest economy shrank -0.5% in the three months to September. This further confirms that Germany is now in recession, with the latest result following a decline of -0.4% in the second quarter. Slumping economic growth across the 15-nation currency bloc is expected to see the European Central Bank slash interest rates again when policy is announced in early December, with markets pricing in at least a 0.50% cut. Traders expect the ECB to ease borrowing costs by 100-125 basis points over the next 12 months.

Switzerland’s UBS Consumption Indicator may push lower in October having staged a brief rebound in the preceding month and after hitting a nearly 3-year low in August. Unemployment ticked up to 2.5% and consumers’ wealth and purchasing power were eroded as Switzerland’s benchmark SMI stock index fell -8.8% while the Swiss Franc lost -3.2%. Expectations of deep economic slowdown saw the Swiss National Bank surprise the markets with an unscheduled cut of benchmark interest rates by a full percentage point last Thursday. The central bank is concerned that a marked slowdown in economic activity will push inflation below the target 2% level as early as the end of this year.

On balance, the forex market is likely to continue to eschew fundamental considerations as risk appetite rebounds, battering the greenback. A very strong showing on Wall St has carried over into overnight trading with key Asian bourses up over 4% and US index futures in positive territory. Investors’ exuberance may be fleeting however as the US GDP report threatens to show the world’s largest economy did worse than originally expected in the third quarter, shrinking -0.5% versus early estimates at -0.3%.


To contact Ilya regarding this or other articles he has authored, please email him at ispivak at dailyfx dot com.

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