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Euro Holds Gains- Will ECB Hint At Tightening ?

Last updated 9/2/2010 5:31 AM ET (GMT -5) 0 Comments - Add your comment

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Boris Schlossberg

Director of Currency Research, GFT

Top Stories

• Swiss Franc benefits from strong data
• IMF warns on UK debt
• Nikkei up 1.5% Europe off -0.5%
• Oil just below $74/bbl
• Gold at $1250/oz.

Overnight Eco

• AUD Trade Balance 1.89B vs. 3.11B
• JPY Monetary Base y/y 5.4% vs. 6.3%
• CHF GDP q/q 0.9% vs. 0.8%
• CHF Retail Sales y/y 4.8% vs. 2.3%
• EUR PPI m/m 0.2%
• GBP UK Construction PMI

Event Risk on Tap

• USD Unemployment Claims expected at 479K
• USD Revised Nonfarm Productivity q/q expected at -1.9%
• USD Revised Unit Labor Costs q/q expected at 1.5%
• USD Pending Home Sales m/m expected at -1.5%
• USD Factory Orders m/m expected at 0.5%

Price Action

• USD/JPY drifts towards 84.00in quiet trade
• AUD/USD holds near .9100 after an earlier sell off to .9050 as Labor looks to hold leadership
• GBP/USD pivots at 1.5400 as house prices weaken
• EUR/USD holds 1.2800 as French data surprises to the upside and GDP revised upward

A relatively muted session in FX markets overnight with cable underperforming the rest of the high beta FX as weak UK housing data weighs on the unit.  UK Nationwide survey showed a much larger than expected decline in prices of -0.9% versus -0.3% eyed while UK Construction PMI data missed forecasts printing at 52.1 versus 53.5 projected.

This was the lowest Construction PMI reading since April when data first broke above the 50 boom/bust line suggesting that the housing sector in UK may now be teetering on the verge of contraction once again. This bodes badly for future UK growth given the fact that the recovery in housing was the primary contributor to Q2 GDP growth. The outgoing CEO of Hargreaves Lansdown, UK's largest retail broker, warned that any uptick in UK interest rates would cause many homeowners to “throw away their keys”, triggering a fresh round of foreclosures. 

We continue to believe that the UK economy remains very vulnerable to the triple threat of declining house asset prices, weaker capital markets and the onset of fiscal austerity measures as we enter the fall season.  Friday’s UK PMI services number now looms very large in trader’s minds and if it misses to the downside like the Construction and Manufacturing data this week, it could pressure the pound further as markets will temper their expectations of UK growth going forward. So far cable has remained steady, benefiting from the broader positive risk flows in the market but has continued to underperform the euro with EUR/GBP cross rising back above the .8300 level in early morning trade.

The economic data from Europe  was considerably better with EZ GDP printing at 1.0% as expected as consumer spending rose at its fastest pace since Q3 of 2007. The data for Q1 was revised upward to 0.8% from 0.6% pushing the yearly growth rate to 1.9% from 1.7%. Surprisingly enough growth was driven most by domestic demand with exports contributing only 0.1% to the expansion. The news suggests that growth in H2 of 2010 should remain relatively healthy despite the clear slowdown in US demand.

In Switzerland GDP data was also stronger than forecast printing at 0.9% versus 0.8% eyed while Retail Sales increased markedly to 4.8% from 2.3% forecast. The news indicates that despite the swift appreciation of the franc, Swiss economy continues to perform well  and the SNB is therefore unlikely to intervene in the EUR/CHF pair despite the fact that it continues to make record lows.

The upside economic surprises out of continental Europe raise the question of whether monetary authorities in the region will begin to move away from the ultra accommodative policies set in place since the credit crunch of 2008. We believe that it may be premature to anticipate any tightening moves just yet. At today’s ECB press conference Jean Claude Trichet  will reaffirm his message of cautious optimism  but is unlikely to provide a time table for the winding down of extraordinary  measures.  Still if Mr. Trichet  drops even a small hint of an upcoming change in policy, the euro could find a very strong bid and target the 1.2900 level during the North American session as markets begin to focus in on the growing disparity in growth prospects between EZ and US economies.  

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About The Author

Boris Schlossberg began his Wall Street trading career more than 20 years ago at Drexel Burhnam Lambert. There, he traded nearly every type of financial product on the market in the U.S., from equities and options to stock index futures and foreign exchange. His innate ability to analyze market information and use it to trade has helped him become an industry-recognized, “go to” trading professional.

These days, whenever the markets move, many organizations turn to Schlossberg for his take on the situation. He is a weekly contributor to CNBC's Squawk Box and a regular commentator for Bloomberg radio and television. His daily currency research is widely quoted by Reuters, Dow Jones and Agence France Presse newswires and appears in numerous newspapers worldwide. Schlossberg has written for publications like SFO magazine, Active Trader and Technical Analysis of Stocks and Commodities. He is also the author of Technical Analysis of the Currency Market and the co-author of Millionaire Traders: How Everyday People Are Beating Wall Street at Its Own Game with Kathy Lien. He joined GFT in 2008.