The Euro reversed US session gains overnight, falling to challenge the 1.47 level, while the British Pound dipped below 1.85 once again. A busy calendar awaits in the forthcoming European session. Most notably, Germany’s economy is expected to shrink in the second quarter, putting the metric at the worst in three years and taking the Euro Zone’s biggest economy within 3 months of recession.
Key Overnight Developments
• New Zealand imports jump 10.5% on demand for consumer goods, give hope to ailing economy
• RBNZ inflation expectations highest in 17 years, but rate cuts remain on tap
Critical Levels
The Euro reversed US session gains overnight, falling to challenge the 1.47 level. DailyFX Senior Currency Strategist Jamie Saettele expects the Euro to correct to at least 1.4981 before downside momentum resumes. Support is seen at 1.4672. Sterling followed the Euro lower, dipping below 1.85 once again. Support is seen at 1.8422 with resistance at 1.8607.
Asia Session Highlights
New Zealand’s Trade Balance saw a wider monthly deficit in July than economists expected, yielding a shortfall of –NZ$781 million versus expectations of –NZ$538 million. The result came on the heels of a strong rebound in imports: inbound volumes grew 10.5%, reversing two consecutive monthly declines in May and June. Most notably, a rise in consumer goods imports drove the increase, printing at an annualized rate of 14%. This counters the recent flood of negative data, suggesting there is indeed a light at the end of the tunnel for the smaller antipodean nation.
The Reserve Bank of New Zealand’s 2-Year Inflation Expectation was revised higher to 3.0% in the third quarter, the highest since 1991. Still, this month has seen the markets steadily calling for the RBNZ to issue 150 basis points worth of interest rate cuts in the next 12 months. Persistent expectations of lower yields will keep the New Zealand dollar under pressure in the near term.
Japan’s Corporate Service Price index saw the growth rate remain steady at 1.3% in the year to July from the preceding period.
Euro Session: What to Expect
A busy calendar awaits in the forthcoming European session. Things start off with the final revision of Germany’s Gross Domestic Product. Expectations call for the economy to contract -0.5% in the second quarter, putting the metric at the worst in three years and taking the Euro Zone’s biggest economy within 3 months of an official recession. Most GDP components are seen registering in negative territory, with Construction Investment seeing the biggest decline of -4.0%. Private Consumption, the largest component of GDP, is seen falling -0.4% and while Capital Investment contracts -1.5%.
September’s GfK Consumer Confidence Survey will give a timely look at how Germany will close out the third quarter, with forecasts putting the metric at 2.0, the lowest on record. In a bit of positive news, Augusts’ IFO Survey is expected to improve a hair to print at 90.3 versus 90.0 in July. The ZEW Survey of analysts’ sentiment improved in the same period on lower oil prices and a softer Euro. A similar dynamic could be seen here, though crumbling hopes for lower borrowing costs could derail optimism. Indeed, the market continues to price in a muted response to sagging growth from monetary authorities. As we noted yesterday, traders expect the European Central Bank to cut interest rates by just 25 basis points in the next 12 months. The market called for 50 basis points as recently as four days ago. It seems ECB President Jean-Claude Trichet and company are betting that cheaper resources will see production costs decline and thereby provide a boost to growth without the need for monetary stimulus.
In Switzerland, the UBS Consumption Indicator may correct lower in July. The metric got a boost in June as Switzerland co-hosted the 2008 Euro Soccer Championships. In any case, traders may question the readings predictive power as the improvement in June failed to forecast the sharp fall in annualized Retail Sales for the same period (0.7% vs. 3.3% expected).
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