Wednesday, 28 October 2009

The Euro continues to consolidate

The Euro continues to consolidate its gains from yesterday as we are seeing a pull back in risk appetite. Lower European equity markets are weighing on the single currency, which has kept the EUR/USD trading around the 1.4400 price level. Euro-Zone producer prices falling to a record low of -6.6% on a yearly basis could raise concerns of further measures from the ECB and add to the heavy trading. However, a 0.3% price increase in June could ease concerns as it may be signaling an end to deflationary pressures.

The first monthly gain in producer prices since July, 2008 will have a major influence over the ECB’s decision on whether to add to their covered bond purchase program. The central bank has maintained that deflation is no longer a concern as they expect that emerging growth and rising energy costs will bring prices back to their target rate of 2.0%. Indeed, energy costs rose 1.4%during the month but still remain 15% lower from a year ago which dragged the annual rate to its record low. The central bank has only exercised 4 billion of its 60 billion purchase program signaling that the bank will refrain from adding to it as it maintains its measured approach. However, Euro-Zone banks continue to tighten lending standards and their deposits remain at elevated levels. The EUR/USD still appears to have potential to reach 1.4613-61.8% Fibo of 1.6037-1.2325

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