At 2:00:00 PM US Oct Fed Beige Book (exp n/a, prev n/a) Event: At 10:00 AM US Treasury Secretary Paul O'Neill due to testify on the semi-annual FX report before the Senate Banking Committee At 6:45 PM Fed Chairman Greenspan scheduled to speak on globalization at the Institute for International Economics.
European majors got a break on Wednesday as currencies looked oversold against the dollar after heavy losses over the past week. Investors took profit from the dollar's rise to multi-week highs and shied away from taking new long positions ahead of tomorrow's European Central Bank meeting. On Tuesday, heightened fears over new anthrax threats reminded markets of the risks to the US economy, and gave a good reason for a minor correction. EUR/USD rose to a session high of 89.44 in European trade, up from an overnight 6-week low of 88.70, but lackluster trade failed to push the dollar significantly lower. Sterling rose over one cent from overnight 9-week lows just below 1.42 to a session high of 1.4306. However, there was no real enthusiasm to take out new long positions in the European currencies after the recent bout of losses against the dollar, and the still prevailing sentiment favors the prospects of the US economy over Europe and Japan.
Bank of Canada's surprise 75 bp cut on Tuesday is likely to make the ECB look like Ebenezer Scrooge tomorrow. The bold move won approval from FX traders who pushed the Canadian dollar higher across the board. The boldness also stands in sharp contrast the ECB's contention that it needs to worry about inflationary concerns and not growth. The cards are definitely stacked against the ECB, but the bank has been resisting the pressure. However, whether or not they do cut rates tomorrow is uncertain because the ECB is know for wrong-footing the market.
Correspondingly, economists polled by are split over the outcome of the ECB meeting, but most expect the central bank to trim its rates by at least a quarter point by the end of next month. Therefore, a 25 bp cut has already been priced into the market, which makes the prospect for a euro rally insignificant were the ECB to lower rates by just 0.25%. A more surprising 50 bp cut would trigger a substantial rise in the euro, possibly above the 90-cent figure. But that appears to be an unlikely outcome because ECB member remarks over the weekend gave the impression the bank was in no hurry to lower rates. In the absence of a cut, EUR/USD is expected to fall, targeting yesterday's low of 88.70 followed by the 88.25/50 area on its way to 87.25, the 61.8% Fibonacci retracement of this year's uptrend from 83.45 to 93.35.
Preliminary data from 3 German states on Tuesday suggested that the national inflation rate is falling towards the ECB's 2.0% target, while data from Italian cities suggested the overall Italian inflation rate is on course to slip to 2.5% in October from the prior month's 2.6%. As expected, today's data from Germany showed import prices declined further to -3.6% y/y in September from -0.9% last month. This bodes well for the inflation outlook in the Eurozone but may not sway the European Central Bank to cut rates this Thursday.
Unfortunately for the central bank, both the market and member economies are calling for a rate cut. That is what caused a bout of euro selling on Monday and Tuesday to a 6-1/2 week low of 88.70 cents. However, the ECB does not like being put in the position where its independence is questioned, and that is another reason the bank is likely to hold off on cutting rates tomorrow. In the meantime, trading appears subdued as dealers brace themselves for either ECB action or inaction. European money market rates were also steady in lackluster trade as dealers held their books closed ahead of the decision.
Dealers also waited on the sidelines ahead of a speech by US Treasury Secretary Paul O'Neill later in the day. O'Neill is due to testify on the semi-annual FX report before the Senate Banking Committee at 10:00 AM, and markets are acutely aware of the risks to the dollar if the strong dollar policy is brought back into question. Chairman Greenspan is also scheduled to speak at 6:45 PM on globalization at the Institute for International Economics.
Sterling dropped sharply from highs around 1.43 to a European session low of 1.4259 following the CBI Q3 report showing business confidence among UK manufacturers plummeted to its lowest in three years in October. The latest quarterly industrial trends survey is the first where all the responses came in after last month's attacks on the United States, and the CBI cautioned that confidence could be unduly influenced in the short term by such dramatic events. Expected orders balance fell to -25 vs +1 in July. Monthly total orders fell -33 vs -31 in September. The business optimism balance fell to -54 in October from -22 in the last survey. The CBI also called for a 50 bp cut from the Bank of England, the first time in three years the CBI has called for such a large rate cut.
USD/JPY rose to a session high of 122.82 but failed to break heavy profit-taking orders above 122.80 yen. USD fell from overnight highs around 123 JPY and traded most of the day above support at 122.50. Stop-loss sell orders were thought to be lined up between 122.00 to 122.20 yen, which would push the dollar lower if triggered. EUR/JPY broke out of the 108.50 to 109.50 range, as it hit a session high of 109.67. However, the cross is likely to remain trading sideways if the euro cannot maintain its gains above the 89-cent mark.
Dealers will also look to see if Wall Street enjoys Wednesday better than it did yesterday in the face of earnings reports for Q3. So far, 85% of the companies reporting matched or exceeded projected earnings targets. Today's lineup before the bell are Honneywell, Viacom and Kodac, and very few key companies are reporting after the bell. Both Dow and Nasdaq futures are in positive territory.
After the market close, the Fed will release the October Beige Book after no release in September. Dealers will look to see if it points to continued economic weakness or if new orders for manufacturing is picking up. Manufacturing continues to be the primary drag on the regional economies, and the beige book noted in the July report that the impact has spread to other industries. Recall that it was this report that sparked this summer's decline in the dollar.