Friday November 17, 2006 - 12:21:53 GMT
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Forex: Mellon FX Daily - European EditionKey Points
â€˘ Weakness in US core CPI is encouraging but a Fed rate cut remains a long way off.
â€˘ Inability of EUR-USD to firm on US data suggests bias is to the downside.
â€˘ G20 meeting may weigh a little on EUR-JPY today.
Yesterdayâ€™s US CPI
data was encouraging, but the 0.1% reading on core CPI is but one small step on the road to possible Fed easing next year. It is far too early to arrive at such a conclusion. Two or three monthâ€™s worth of +0.1% outcomes on core PCE prices (the FOMCâ€™s preferred measure of inflation) will be needed to offer some assurances to the Fed. Indeed, if core CPI does peak out this will cause much confidence in the equity market as well as lower bond yields, both of which will be supporting factors for the economy. From that perspective the arguments in favour of a rate cut are likely to remain limited and we would stick with the view that the next move in rates is more likely to be up rather than down.
The USD reaction to yesterdayâ€™s developments was notable. Once again some weak US data failed to stir EUR-USD
on the upside, suggesting that the bias remains lower. The market has shied away from a vigorous test of the top end of the current trading range. Below 1.2760 today would trigger more slippage. The fear of some anti-EUR comments at the weekendâ€™s G20 meeting may also weigh on the EUR, especially against the JPY. However, EUR-JPY upside looks likely next week if nothing comes out of G20.
â€“ housing starts and building permits data are due. Starts bounced back 5.9% m/m last month, although this was after several sharp falls over the previous three months totaling 14.3%. While the starts data has been exhibiting m/m volatility, permits have been falling without interruption since January (see chart). They are down a cumulative 25.4% over this period, highlighting the drag that housing investment will have on both housing starts and the GDP data in the short-term. The NAHB housing index released yesterday evening was up again m/m, albeit of 15 Â˝ year lows two months earlier. Housing market data can look dramatic when behaviour changes en masse, as it has done this year. Key now is whether this weakness continues into next year. So far the fallout for the consumer has not been that negative.
Data/event EDT Consensus*
EU Trade balance (Sep, sa) 10.00 -â‚¬3.0bn
US Fedâ€™s Fisher on importance of EUR 12.30
US Housing starts (Oct) 13.30 1680k
US Building permits (Oct) 13.30 1630k
Latest data Actual Consensus*
US NAHB housing index (Nov) 33 31
* Consensus unless stated
ď›™2005, Mellon Financial Corporation Note: Although obtained from sources believed by us to be reliable, Mellon Financial Corporation and its affiliates cannot guarantee the accuracy or completeness of the information upon which this report is based. This report does not purport to disclose the risks or benefits of entering into particular transactions and should not be construed as advice in any specific instance. The views in this report constitute our judgement as of this date and are subject to change without notice.
Ian Gunner 44 20 7163 5996 06.40 EDT Monday May 31 2005
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