Dollar sees early strength in Europe but awaits the German ZEW numberGermany’s final CPI for September was revised lower by 0.1% to +0.1% MoM and +2.4% YoY. This is the highest level of inflation for 2 years on the back on oil prices which have pushed up fuel prices by +8.9% YoY and light heating oil by +3.1% YoY. While there is little that could be done to ally this spike in inflation the ECB will be watching this carefully and could well be another nail in the coffin for the next rate decision.
Swiss Adjusted Retail Sales saw an increase of +3.8% YoY in August, just a little below forecasts of 4.1%. While not quite as positive as expected the numbers still demonstrate a healthy consumer demand and are consistent with the SNB hiking rates. The next problem is when and how the SNB view the risks surrounding the credit crunch.

The following economic releases are due today:
September
U.K. CPI (MoM) +0.3%
U.K. CPI (YoY) +1.9%
U.K. CPI Core (YoY) +1.8%
U.K. RPI (MoM) +0.4%
U.K. RPI (YoY) +4.0%
U.K. RPI Excl mortgage payments (YoY) +2.8%
Euro-zone CPI (MoM) +0.4%
Euro-zone CPI (YoY) +2.1%
Euro-zone CPI Core (YoY) +1.9%
U.S. Industrial Production +0.1%
U.S. Capacity Utilization 82.1%
October
German ZEW Survey: Economic Sentiment - 22.3
German ZEW Survey: Current Situation +70.0
Euro-zone ZEW Survey: Economic Sentiment - 25.0
U.S. NAHB Housing Market Index +19.0

In spite of Trichet’s comments concerning verbal discipline regarding comments on the markets he did also rebuke finance officials for trying to place pressure on the ECB to act on the high value of the Euro. With the IMF’s Rato having categorically stating that the Dollar is overvalued and the core belief that exchange rates are a natural mechanism where demand and supply finds an equilibrium the prospect of G7 renewing their failures of the 1980’s when they began concerted intervention is wholly unlikely.
This should open the doors for additional losses by the Dollar and although there could well be an initial extension of last night’s Dollar recovery, the underlying direction still remains lower.
While the release calendar is much fuller today there are just two numbers that have a high probability of providing the catalyst for the day, these being the German ZEW survey and the U.S. NAHB Housing Index. With German numbers having picked up from earlier in the month there is a strong risk that this will be Euro-positive while it is difficult to imagine anything but a poor number from the NAHB.
If the German numbers are good it will strengthen the argument for a hike by the ECB and this will most likely reinforce the carry Trade with Dollar-Yen and Euro-Yen also looking to make further gains following an early pullback.
Note important support and resistance areas:
USDJPY EURUSD USDCHF GBPUSD
Res: 117.73-93 1.4281-00 1.1893-27 2.0473-93
Res: 117.10-40 1.4190-15 1.1851-61 2.0400-20
Spt: 116.30-46 1.4127-46 1.1770-80 2.0317-45
Spt: 115.43-90 1.4068-00 1.1707-25 2.0244-89
See Also