Talking Points
JPY Machine Tools orders rise
German wholesale inflation declines more than expected
EU revises GDP downward
FOMC minutes on tap
After two straight days of volatile trading, the majors returned to treading water in quiet Asian and European sessions today as barren economic calendars provided the perfect excuse for a pause in the price action. Both euro and yen carved out tight ranges of 25 points and 50 points respectively as traders braced for a battle around the key support levels of 1.2500 in EUR/USD, 1.2000 in USD/JPY and 1.8500 in GBP/USD.
In UK hawkish comments by BOE Governor Mervyn King help fuel a small rally in the pound which saw the unit reach 1.8582 before backing off. Mr. King expressed his skepticism regarding the latest batch of inflation data, noting that the declines in September were temporary. The news stemmed sterlings slide for the time being as traders interpreted his words to mean that the MPC will seriously consider another rate hike before the year end which would raise rates UK short term rates to 5.0%.
In the Euro-zone the EU commission poured cold water on expectations of robust growth in the region in 2007 be downwardly revising their GDP projections for the three next quarters. Meanwhile GDP growth for Q3 of 2006 printed at 2.7% - slightly better than the 2.6% expected but the growth for the prior quarter was marked significantly lower to 2.2% from 2.6% initially reported. Overall, the GDP figures suggested that growth in the 12 member region continues at steady, workmanlike pace and is unlikely to impact ECB monetary policy decisions as long as it remains within reasonable distance of consensus expectations.
With no major economic news today, focus will turn to the minutes of the latest FOMC meeting to gauge the current bias of the committee. Over the past few days most the US monetary policymakers expressed a decidedly hawkish bias, indicating that they may err on the side of tightening especially if inflationary pressures once again begin reappear in the economy. We, however, continue to remain dubious about the bullish bounce back case scenario for the US economy unless oil prices remain at present levels or drop lower. As, Morgan Stanleys Richard Brener recently pointed out, The gasoline price drop alone would give consumers up to $100 billion in discretionary wherewithal, compared with the August peak. And the slippage in natural gas and heating oil quotes could knock $20-30 billion from winter heating bills. These are powerful arguments for dollar bulls but they must remain in place for the rest of the year if the greenback rally is to continue.
