Euro And Pound Choppy Ahead Of U.S. Bank Recapitalization Plan Announcement

Talking Points

• Japanese Yen: BoJ to Hold Unscheduled Meeting
• Pound: Inflation Rose Fastest in 11 Years
• Euro: German ZEW Sharply Falls
• US Dollar: Announcement of Recapitalization Plan Due Today

Euro and Pound Choppy Ahead Of U.S. Bank Recapitalization Plan Announcement

After yesterday's rally the Euro saw choppy trading throughout the overnight session as markets await the details of the U.S. recapitalization plan. A sharp fall in the German ZEW Survey failed to impact price action as the EURUSD actually appreciated following the print of -63. Economists were expecting -51.1 after last month's -41.1, which was the first decline in three months. Meanwhile, industrial production in the Euro-zone rose to 1.1% from -0.2% led by Germany.

The credit crisis is weighing on sentiment in Europe and although the German ZEW survey was conducted before the recent bank bailouts, the sharp drop underlines the level of concern. The declining sentiment will assuredly impact growth going forward as businesses and consumers have retrenched and will continue to be conservative in their future spending. Although, the region saw a brief improvement in industrial production led by a jump in energy output to 1.3% from -0.9%, it isn't expected to continue given the current market conditions. ECB's Stark stated that the recent rate cut by the ECB will help stabilize the situation in the medium term, but that price stability must remain the focus of the central bank. The rhetoric shows that the MPC will most likely leave rates unchanged in November and unless inflation abates, for the remainder of the year. This should help the Euro hold on to recent gains and we may see further appreciation as interest rate expectations decline.

Inflation in the U.K. rose to 5.2% from 4.7% in September which was the highest on record since 1997. The majority of the gain was from the rise in utility costs to 12.0%% from 5.2% the month prior, as the effects of oil's ascent to $147 per barrel filter through. However, expectations are that the recent drop in oil prices and the global slowdown will bring con prices back toward the BoE's 2% target. The Pound saw whipsaw action as markets digested the yesterday's nationalization of RBS,HBOS and Lloyds and the potential for further rate cuts by the central bank. Indeed, Credit Suisse overnight index swaps are pricing in a 117 bps worth of cuts over the next twelve months, which is down from 145 bps on October 10.

The USDJPY has consolidated at 102.00 as the markets await an unscheduled BoJ meeting at 11:30 GMT, where they are expected to join the global initiative. Although there has been some speculation that a rate cut may be in store, given the current 0.50% rate, there isn't room for cuts. The central bank will most likely announce measures to improve liquidity as they look to do their part in stemming the current crisis.

The U.S. is scheduled to announce the details of their recapitalization plan at 8:30 EST, which is expected to include a $250 billion direct investment in troubled banks with $125 billion earmarked for nine major banks. The plan will also call for a guarantee of on interbank lending which follows the action from Europe and was necessary to prevent arbitrage opportunities and the flow of funds overseas to safer havens. The FDIC will also build upon their insurance coverage, by guaranteeing all business non-interest bearing deposits. The dollar could benefit from the announcement of cash flows come back to the safety of the U.S. However, if the plan continues to fuel risk appetite the greenback could see the weakness form yesterday continue as investors more their money from U.S. treasuries to riskier assets overseas.

DailyFX

Disclaimer

Investment in the currency exchange is highly speculative and should only be done with risk capital. Prices rise and fall and past performance is no assurance of future performance. This website is an information site only. Accordingly we make no warranties or guarantees in respect of the content. The publications herein do not take into account the investment objectives, financial situation or particular needs of any particular person. Investors should obtain individual financial advice based on their own particular circumstances before making an investment decision on the basis of the recommendations in this website. While we try to ensure that all of the information provided on this website is kept up-to-date and accurate we accept no responsibility for any use made of the information provided. All intellectual property rights are the property of Daily FX. Daily FX and its affiliates, will not be held responsible for the reliability or accuracy of the information available on this site. The content herein is provided in good faith and believed to be accurate, however, there are no explicit or implicit warranties of accuracy or timeliness made by Daily FX or its affiliates. The reader agrees not to hold Daily FX or any of its affiliates liable for decisions that are based on information from this website. Daily FX highly recommends that before making a decision, the reader collects several opinions related to the decision and verifies facts from at least several independent sources.