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• Markets consolidate as traders await China's response to EFSF
• French Consumer spending falls
• Nikkei 1.39% Europe up 0.90%
• Oil at $93/bbl
• Gold $1737/oz.

Overnight Eco

• JPY Household Spending (YoY) (SEP) -1.9% vs. -3.4%
• JPY National Consumer Price Index (YoY) (SEP) 0.2%
• JPY Industrial Production (MoM) (SEP P) -4.0% vs. -2.0%
• CHF KOF Swiss Leading Indicator (OCT) n/a

Event Risk on Tap

• USD Personal Income (SEP) expected at 0.3%
• USD Personal Spending (SEP) expected at 0.6%
• USD Personal Consumption Expenditure Core (MoM) (SEP) expected at 0.2%
• USD U. of Michigan Confidence (OCT F) expected at 57.8

Price Action

• USD/JPY quiet at 75.85
• AUD/USD 1.07000 caps any rally
• GBP/USD above 1.6100 despite weak consumer data
• EUR/USD 1.4200 caps for now

A very quiet night on the currency market as consolidation is the theme of the day in the wake of more than 200 point post EU Summit rally in the EUR/USD yesterday.  Focus now turns to China with the head of the EFSF now in Asia in order to solicit capital for the fund. There was some speculation that the Chinese may demand a political quid pro quo, in return for investment by asking the Europeans to refrain from criticizing their currency policy.

As of now we have no firm commitments but the Chinese who already have a 600B EUR stake in the region’s sovereign bonds will clearly have an interest in supporting European credit markets. However EFSF chief Klaus Regling tried to dampen any expectations saying that he doesn't expect "any precise outcome" from his visit to China, where he said he is meeting officials from China's central bank and Ministry of Finance. "There will be no conclusion, certainly, today during our visit," he said.    

If China does commit a sizable amount to EFSF the rally in EUR/USD  could see one further thrust higher, but with  political drama now resolved, attention may turn back to the economic fundamentals  in the region which have been problematic at best over the past several weeks.  The latest  news showed that French consumer spending surprised to the downside as demand fell unexpectedly in September. Households in Eurozone’s second largest economy spent -0.5% less in September than in August versus expectations of 0.1% rise.   On a year over basis consumer spending contracted by -1.3%. 

Consumption is the largest driver of French economy and today’s data bodes badly for growth into the end of the year. French consumers have been clearly affected by the expanding credit crisis in the region and today’s news will only exacerbate concerns that French finances may deteriorate into Q4 of this year.  For the time being the EUR/USD continues to trade on the fumes of the  EU summit deal, but if the economic data does not begin to show some improvement soon , the markets will begin to price in the possibility of a rate cut from the ECB  and that dynamic could weigh on the pair into the year end.

In North America today the market will get a glimpse of the Personal Income/Spending data as well as the revised U of M numbers.  Both reports are expected to show improvement, but despite relatively positive economic data, the greenback has weak across the board this week losing ground not only to risk currencies but to safe harbor FX as well.  We believe the reason lies with the Fed. As long as US monetary officials continue to maintain their dovish rhetoric  and as long the threat of QE3 looms on the horizon, the dollar is unlikely to stage a sustained rally. This fear of further dilution goes a long towards explaining the  disconnect between rates and USD/JPY. The pair has been mired near all time lows despite the fact that 3M LIBOR spread has widened. This price action is likely to continue until the Fed assumes a more neutral posture.   

FX Upcoming

Currency	GMT	EST	Release	Expected	Prior
USD	12:30	8:30	Personal Income (SEP)	0.3%	-0.1%
USD	12:30	8:30	Personal Spending (SEP)	0.6%	0.2%
USD	12:30	8:30	Personal Consumption Expenditure Core (MoM) (SEP)	0.2%	0.1%
USD	13:55	9:55	U. of Michigan Confidence (OCT F)	57.8	57.5

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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.