Tenative EUR Unhinged by Germany

For the FX trader the answer seems to be to follow equities. So far, stock moves look to be pushing FX back into risk averse mode. There was a short reprieve to abated risk attitudes at the Asian open when investors welcomed an improvement in Chinese manufacturing data. The October flash HSBC manufacturing PMI improved to 49.1 compared with a final reading of 47.9 in September. However, European data has managed again to disappoint, hurting the EUR and able to provide further proof that the Euro-zone remains firmly stuck in recession. Global slowdown in growth, lower earnings and Spanish woes are a cocktail of mixes that will continue to weigh on risk appetite.

The decline in Euro-zone business activity has deepened in October, suggesting that the Euro economy has made a poor start to Q4 and that a recovery is along way off in the horizon. The composite PMI index fell to 45.8 from 46.1, compared with expectations of a small increase. The danger signs remain with the headline print dropping further below the 50 watermark, indicating a steeper pace of decline in activity amongst the Euro members from month-to-month. Of note is that that activity fell faster in manufacturing and contracted close to an unchanged rate in services.

The Euro’s largest economy, Germany, has not been able to escape economic scrutiny this morning. The German manufacturing and services data was also weaker than expected. It’s very own preliminary composite PMI headline fell to 48.1 this month from 49.2 in September. The bad news did not stop there. German business confidence fell for a sixth consecutive month to its lowest level in three years-according to the Ifo survey. The business confidence index fell to 100 from an unrevised 101.4 in September.

The drop in the German index is a sure sign that Europe’s “engine” is running out of steam. Leading indicators in Germany are providing evidence that recessionary risks in the German economy remain real and ever increasing. Last week the German government managed to slash its forecast for growth in 2013 to +1% from +1.6%. So soft Ifo, Euro-zone PMI’s and further weakness at zone’s core has been reason enough to see sustainable EUR selling so far this morning.

Switching to State side, the market has to contend with Uncle Ben and his fellow interest rate announcing cohorts. Today’s FOMC meeting is expected to be a tad tamer than the previous two closely watched gatherings. Proof is in the pudding, copy and rhetoric is far less this time round. With Operation Twist and the latest MBS buying programs expected to continue through year end, it is probably too early to signal the Fed’s next set of policy plans. Many expect this gathering to focus on communications issues and no surprises. However, that is always easier said than done.

Is the single unit itching to go lower? The bulls have been rampant and vocal over the past two weeks. Now they are in danger of just slipping away. Many of their positions have been taken out over the past 48-hours. This EUR market currently seems to be sitting mostly flat, uncertainty prefers that. With the daily charts mostly heading south, expect many to use recovery action as fresh opportunities to set short trades in play. There are certainly some EUR’s to go above the figure, congesting around 1.3010-20. On the downside, negative momentum will be expected to target the 200 DMA around 1.2830-40.

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