â€¢ Japanese Yen: Ranges in line with equities, Overall Household spending better
â€¢ Australian Dollar: Confidence falls to two year low
â€¢ Euro: Shrugs off weak consumer confidence numbers
â€¢ British Pound: Breaks above 1.9900 on Better CBI
â€¢ US Dollar: Durable Goods today
A quiet range bound night in the currency markets as traders prepared for tomorrowâ€™s FOMC meeting with the overwhelming majority of participants looking for another 50bp cut from the Fed. The EURUSD was mildly hurt at the start of European trade by weaker than expected French consumer sentiment data as well as rumors that ECB was in the midst of bailing out several Spanish banks. The pair however returned to it opening levels by the start of North American trade as attention turned to US Durable Goods numbers and the prospect of further easing by US monetary officials.
Todayâ€™s Durable Goods report is expected to rebound from last monthâ€™s negative print but strictly on the strength of transportation orders. Analysts expect the slowdown in consumer spending to continue with ex-transport estimates pegged at 0% vs. 0.8% the month prior. If Durable Goods print much weaker than forecast they will reinforce the notion that US economy which is 70% consumer based is headed into a tailspin and will likely lift the EURUSD beyond the 1.4800 level on the assumption that the Fed will be forced to ease by 50bp.
A 50bp cut by the Fed, coming only days after the 75bp cut last week would increase the interest rate differential in the EURUSD to 100bp in favor of the euro, fueling more demand for the European currency from traders and investors seeking better yield. While the economic situation in the EZ is beginning to mirror the slowdown in the US, there is no evidence that ECB will consider easing any time in the first half of 2008. Therefore the EURUSD has the potential to challenge new highs not due to any organic growth from the EZ but on pure anti-dollar sentiment alone.
In other economic news, Japanese Overall Household spending rose by 2.2% it s highest value in 3 months , but the positive data was tempered by the fact that weak employment growth and continued decline in disposable income. In UK on the other hand the CBI Distributive Trades survey showed a less than expected decline to 4 from 8 as consumer demand help up better than expected. However, here too the news was not all rosy as Durable goods component saw the sharpest drop of all.
Overall, there was little in the CBI report to suggest that BOE will remain neutral given the serious slowdown in consumer spending gauges over the past several months. Cable however continued to rise in early North American trade breaking through the 1.9900 barrier. If the Fed cuts by 50bp tomorrow sterling could retest the 2.0000 level as the anti-dollar rally continues.
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