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London Session

Tue, Oct 13 2009, 10:14 GMT
by Forex.com Research Desk

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EUR/USD took a tumble on the back of a much weaker than expected German ZEW survey, though buyers quickly emerged lifting the EUR back towards the 1.4800 level. The ZEW registered a fall in October to 56.0 from 57.7 the previous month, counter to market expectations for a rise. The ZEW state that the index reflects the prevalent opinion that ''the economy will improve only gradually.''
Last month the ZEW also disappointed the market suggesting that investors have positioned themselves fairly cautiously ahead of the next round of economic data and ahead of the upcoming round of quarterly results. This may limit the size of a downward correction if data disappoints.

Ahead of the ZEW release, EUR/USD had risen to the session highs though range trading had persisted with European stock markets unable to maintain the better tone seen in Asia. The better tone in stock markets overnight had helped push EUR/JPY higher. The AUD, however, was weighed down by a decline in Sept business confidence, this down 4 points most likely on last week's RBA rate hike. By contrast, the NZD had found support overnight on the back of much better than expected retail sales data. Retail sales rose +1.1% m/m in August reflecting the improving economic backdrop. In general, however, the recovery in NZ has lagged that of Australia. RBNZ governor Bollard stated on Sep 10 that rates may not be raised until the latter part of 2010 to help the economy and this has sapped the potential of the NZD. 

UK housing data have continued to offer evidence of stabilisation. UK CPI registered a far softer than expected 1.1% y/y in Sep. CPI in recent months has been 'sticky' on the downside and the BoE stated in the minutes of the Sep MPC that following a Sep decline that CPI could rise, potentially sharply, in the coming months. Some forecasters now see CPI back at 2.0% by year end. Thus, despite today's weaker than expected data there is still the risk that the BoE may revise higher its inflation forecasts in next month's Inflation Report. On the margin today's data may open the door a little further to more QE next month. However, an upward revision in inflation may limit the ability of the Bank to significantly increase its accommodative stance. Cable quickly recouped its post data losses and EUR/GBP ran into sellers at 0.9410.
Sterling, however, continues to hold below last night's closing levels vs both the USD and the EUR. Last week's statement by Tory party leader Cameron that QE will have to be reversed soon to avoid inflation and this week's responses from PM Brown have put the decisions by the BoE back in the political limelight. However, this should have little to no bearing on BoE policy decisions next month. 

This afternoon, the USD may see some support from the speech by Fed hawk Kohn, the Fed's Dudley is also speaking. On the data front ABC consumer confidence and Canadian new housing price data are due.  

Published on  Tue, Oct 13 2009, 10:19 GMT

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