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US Dollar Backs Off As Markets Brace for NFP, Rescue Plan Vote (Euro Open)
Friday, 03 October 2008 04:54:42 GMT  |  Ilya Spivak, Currency Analyst
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The US dollar pulled back against the Euro and the British Pound in overnight trading. Looming event risk is likely to continue weighing on the greenback as the US House of Representatives is set to vote on the US Treasury’s financial market rescue plan while expectations suggest the economy lost 105 thousand jobs in September.

Key Overnight Developments

• Australian Service Sector Shrinks Again in September
• TD Securities Inflation Rises, but RBA Rate Interest Cuts to Continue


Critical Levels 

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The Euro retraced higher in late overnight trading, regaining position above the 1.38 level. The next level of near-term resistance is found at 1.3982, with support at 1.3697. The Sterling also corrected some of the losses sustained in US hours, retaking the 1.77 mark. Resistance is seen at 1.7809, with support at 1.7548.


Asia Session Highlights 

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The service sector shrank for a sixth consecutive month in September according to the AiG Performance of Service Index. The metric printed at 44.9, a slight improvement over last month's reading at 39.3, a 5-year low. The Reserve Bank of Australia cut interest rates by 25 basis points in September, allowing for the uptick. That said, the economy continues to face substantial headwinds both domestically and abroad, keeping the reading below the key 50 "boom-bust" level. Looking at trading in index swaps, the market is pricing in 150 basis points in additional monetary easing from the RBA over the next 12 months.

TD Securities Inflation ticked higher for the 12th consecutive month, printing at 4.5% in the year to September. The reading is unlikely to derail the Reserve Bank of Australia’s plan to aggressively cut interest rates in the coming months. Bank Governor Glenn Stevens has said that inflation will peak at 5% in the fourth quarter and has started easing rates under that assumption. The reading at 4.5% remains within those bounds, suggesting rate cuts remain on schedule for the time being.


Euro Session: What to Expect 

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Expectations call for Switzerland’s Consumer Price Index to show headline inflation slowed to an annualized 2.7% in September from 2.9% in the preceding month. This would be consistent with the Swiss National Bank’s expectation that inflation will price pressures will moderate in the second half of the year and validate their decision not to raise borrowing costs. Indeed, bond yield forecasts suggest the SNB will cut rates by 25 basis points in the second quarter of next year.

In the UK, economic data is to continue painting a bleak picture of the economy. The Purchasing Managers Index is expected to see continued contraction in the services sector with a print at 48.0 in September versus 49.2 in the preceding month. Meanwhile, the Bank of England Housing Equity Withdrawal figure is set to show that Britons cut borrowing against the value of their homes to just 2.5 billion pounds, the lowest in 9 years. This makes sense as the UK housing slump continues to weight on real estate values. Indeed, yesterday saw Nationwide’s measure of house prices shrank a whopping -12.4% in the year to September.
 
In a rare bit of good economic news from the Euro Zone, Retail Sales are expected to rise 0.3% in August. The uptick will likely come courtesy of cheaper fuel: Europeans see a boost to disposable income as crude oil continues to fall. The same dynamic saw German retail sales rebound to grow 3.6% in August versus a contraction of -0.8% in July. On balance, annualized retail sales are still seen standing firmly in negative territory at -2.4%, suggesting economic conditions in the 15-nation bloc remain under heavy downward pressure. Indeed, ECB President Jean-Claude Trichet sounded decidedly dovish yesterday following the bank’s interest rate announcement even though the bank fell short of actually cutting borrowing costs. As it stands, the market is pricing in 100 basis points in monetary easing over the next 12 months.
 
 
Related Articles:
 
Forex Technicals: The Day Ahead, October 3
EURUSD Trend Change in the Works before Bailout and NFP Event Risk (Forex Video)
 
 
 
To contact Ilya regarding this or other articles he has authored, please email him at ispivak@dailyfx.com.

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