Mid-Day Report: Euro Dives Following Dexia $9.2b Bailout

Euro dives sharply in early US session as markets get more bad news from European financial sector. France and Belgium are believed to be leading a state-backed rescue of the world's largest lender to local government, Dexia SA. Belgian Prim Minister Leterme said that Dexia will receive $9.2b to shore up its capital after its shares had a record decline yesterday. This, in addition to the still fresh news of failure of Belgian Fortis, UK B&B and German Hypo Real Estate, is raising concern that problems in Europe might not be much better than that in the US. EUR/USD dived to below 1.42 level and the development is so far consistent with the technical view that corrective rebound from 1.3881 has completed at 1.4867 already. Further downside is expected to be seen to retest this low at least.

US President Bush warned in early US morning that the US economy is depending on decisive actions from the government or the economic damage could be "painful and lasting". Presidency candidate McCain and Obama urged Congress to redouble efforts to save the financial system bailout. Stocks rebounded after yesterday's historical sell off following surprised rejection of the $700b bailout plan by House. The Japanese yen gives back some against but remains generally firm.

The economic calendar is very busy today but markets paid little attention to the load of data released. US S&P Case-Shiller dropped more than expected by -16.3% yoy in Jul. Chicago PMI dropped less than expected to 56.7 in Sep. Conference Board Consumer Confidence improved more than expected to 59.8 in Sep. Canadian GDP was surprisingly strong, rising 0.7% mom in Jul. UK Q2 GDP final was revised higher from 1.4% yoy to 1.5% yoy. Gfk consumer sentiment improved from -36 to -32 in Sep. Eurozone HICP flash moderated to 3.6% yoy as expected. Germany unemployment rate was unchanged at 7.6% in Sep. Australia retail sales posted stronger than expected gain of 0.3% mom in Aug. Japanese manufacturing PMI dropped further to 44.3 in Sep. Household spending dropped much fore than expected by -4% yoy in Aug. Unemployment rate rose more than expected to 4.2% in Aug. Industrial production fell -3.5% mom, -6.9% yoy in Aug. Housing started rose 53.6% in Aug.

EUR/USD Mid-Day Outlook

Daily Pivots: (S1) 1.4300; (P) 1.4435; (R1) 1.4567; More

EUR/USD's fall from 1.4867 resumes by taking out 1.4302 low and reaches as low as 1.4150 so far. Break of 1.4512 support confirms that rebound from 1.3881 has completed at 1.4867, below 1.4908 resistance as expected. At this point, intraday bias remains on the downside as long as 1.4429 minor resistance holds. Further decline is expected to be seen to retest 1.3881 low and 1.3851 key medium term support. On the upside, above 1.4429 will turn intraday outlook neutral first but another fall is still expected after recovery.

In the bigger picture, rebound from 1.3881 is treated as correction to whole decline from 1.6038 only and should have met upside target of 1.4629 and 1.4908 resistance zone already. Recent development argues that such correction should have completed. And the whole fall from 1.6038 is probably set to resume. As discussed before, the double top reversal pattern (1.6019, 1.6038) confirms that medium term up trend from 1.1639 has completed at 1.6038. Sustained break of 50% retracement of 1.1639 to 1.6038 at 1.3839 will encourage further decline to next target of 61.8% retracement of 1.1639 to 1.6038 at 1.3319 first.On the upside, sustained break of double top neckline resistance at 1.5284 is needed to confirm decline from 1.6038 has completely finished. Otherwise, medium term outlook will remain bearish even though the rebound from 1.3881 might be stronger than we expect.

Forex News Digest

• Case-Shiller U.S. Home Price Index Continues to Decline in July
• Overnight USD LIBOR Makes Biggest Jump on Record
• UK's Darling Says Policy-Makers Will Protect Financial System
• Canadian Price Indexes For Raw Materials, Manufactured Goods Decline
• Canadian GDP Rises 0.7% in July
• Overnight News Recap: Flurry of Data Against Backdrop of Monday's Aftershocks
• U.S. Has Special Responsibility, Says EU Commission
• UK GDP Stagnates in Q2 With Flat Growth Reading
• Euro Zone Inflation Slows to Annualized 3.6% in September
• German Unemployment Rate Holds at 7.6% in August
• Euro Falls Against Dollar as Dexia Gets $9.2 Billion to Shore Up Capital
• U.S. Heading for Deeper Economic Slump, With or Without Treasury Bailout
• Fed May Need to Dip Further Into Toolbox as Congress Tries to Revive Bill
• Pound Rises Against Euro as Stocks Advance on Rescue-Plan Speculation
• Australian Dollar Heads for Record Quarterly Drop as Global Growth Slows

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