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Euro Weakens As Inflation Concerns Abate, Will NFP's End Dollar Rally?

Friday, 05 September 2008 10:22:17 GMT  |  John Rivera, Currency Analyst

The Euro retested the 1.4220 price level twice in overnight trading after reaching the level yesterday. The first attempt came after ECB official Nowotny stated 'What we see is that there is an expectation that the inflation development will weaken in 2009 compared to 2008, though unfortunately a clear weakening of the economic growth as well.

Talking Points   

·          Japanese Yen: Risk Aversion Supporting Yen Crosses

·          Pound: Consolidating above 1.7600

·          Euro:  German Production And Easing Inflation Concerns Weigh On EURUSD.

·          US Dollar: NFP’s On Tap

 

Euro Weakens As Inflation Concerns Abate, Will NFP’s End Dollar Rally?

 

The Euro retested the 1.4220 price level twice in overnight trading after reaching the level yesterday. The first attempt came after ECB official Nowotny stated 'What we see is that there is an expectation that the inflation development will weaken in 2009 compared to 2008, though unfortunately a clear weakening of the economic growth as well.' Although, the Austrian central bank head would caution of second round effects, his remarks only reinforced the dour outlook for the Euro-Zone economy. German industrial production declining 1.8% in July from a revised lower 0.1% the month prior, would lead to a second run at the support level.

 

Industrial production in Germany fell as durable good orders dropped 6.5% followed by a 3.7% drop in capital goods. The data demonstrated that the outlook for the economy has deteriorated which has curbed longer term investments.  President Trichet’s remarks following yesterday’s decision to keep the benchmark rate at 4.25%, did little to ease concerns of a possible recession in the economic union. Although the central bank leader delivered his usual hawkish rhetoric, comments such as the Euro-zone economy is ”currently experiencing an episode of weak activity” fueled bearish sentiment. Traders have increased their bets that a rate cut will be the next policy action by the MPC, as Credit Suisse overnight index swaps pricing in 42bps worth of cuts by the ECB over the next 12 months.

 

The USDJPY has consolidated after yesterday’s monumental fall as heightened risk aversion sparked a flight to safety. The declining global growth outlook and the more troubles from the financial sector sent the pair briefly below 106.00. We could see further weakness if the upcoming labor report prints worse than expected.

 

 

Typically, the Non-Farm Payrolls release has been a major market mover in the past, and highlights the main event risk for the US dollar. Market participants expect payrolls to fall 75,000 in August, while the unemployment rate is anticipated to hold steady at 5.7%. The bigger than expected decline in the ADP employment index paired with the upward trend in initial jobless claims continues to reflect the growing weakness in employment demands, and raises the argument that NFP’s could fall well below expectations. Meanwhile, the unexpected recovery in the service sector paired with a rise in durable goods demands may help to limit the downside risks for employment, and add to dollar strength. However, comments from FOMC member Janet Yellen that the U.S. economy will experience stalled growth into 2009 may keep the greenback in check.

 

 

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For More Fundamental Analysis, Check Out Our Other Daily Reports.

 

Related Articles: US NFP And Canadian Employment Data Leverages A USDCAD Setup

 

 

 

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