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By Dean Popplewell

Risk this morning is being tentatively applied on signs of stronger fundamentals in the U.S. economy. Spain, too, appears to be softening its stance on seeking financial assistance. A senior Spanish official revealed yesterday that Madrid is considering a request for a line of credit from the EU’s new bailout program. To date, the Spanish prime minister has been playing a dangerous strategy, betting that another bout of market turmoil would enable him to broker better terms over German resistance. Rajoy’s perverse way of thinking is that “the worse that it gets, the better it is” for Spain. Everyone realizes that defending Spain is crucial because its economy doubles the output of Greece, Ireland, Portugal and Cyprus combined. Perhaps, finally, we are witnessing the Iberian country’s first details of their plans for support, before its debt problems become wholly uncontrollable. Investors seek more assurance, especially after S&P cut the long term credit rating of 11 Spanish banks today. The perception that Spain is willing to do something is, so far, enough for investors, but they always want more.

It’s mostly ingrained in the market to “buy the rumor and sell the fact.” The EUR has been merrily doing both this morning. Today’s highlight, so far, has seen the German ZEW economic sentiment index rise to -11.5 from -18.2 in September. The closely watched index implies that the risks for the German economy may have somewhat diminished. Normally, this is a respected index for indicating the turning points in the German economic cycle. Last month had been the first time in five months, or in five releases, that saw the print rise. The “new” positive trend has coincided with the ECB’s announcement and willingness to buy unlimited amounts of government debt to help the periphery problem members.

Do not be fooled, Germany, too, faces its own challenges. A few more experts expect the German economy to “cool down” instead of “brightening up.” Growth projections have been revised almost everywhere and Germany is included. Growth in the current year has been shaved from +0.9% to +0.8%, while next year’s projections have been halved by other researchers to +0.5% from +1%. Germany is the engine and the might of Europe. Whatever direction its economy goes, the rest of the eurozone members will tend to follow!

When the market is truly sitting on its hands, just like now as we wait for the Euro Summit, it becomes a stretch to justify taking on new positions. Sometimes being inactive and sitting on the sidelines is a proactive move. Again, this morning, markets should be expecting relatively little directional impulse from today’s U.S. September data. Industrial production is expected to have advanced at a +0.2%, m/m rate after the -1.2% drop in August. The uptick will largely reflect a rebound in mining and utilities after the weather related disruption in August. U.S. manufacturing is expected to remain fairly weak and, therefore, not a game changer. Meanwhile, analysts expect the CPI report to show a strong reading, perhaps a +0.5% m/m rise due to gas. This would result in the strongest back-to-back months for headline CPI in four years. Uncle Ben cannot be expected to continue to throw the word “subdued” about as liberally. However, core prices are anticipated to rise a tamer +0.2%. Finally, the TIC portfolio flow report for August will also be released, along with the NAHB housing market index for October and that’s enough said on these two releases.

oct 16

This week opened up with choppy price action around the 21-DMA (1.2949). Failed attempts to breach the 200-DMA (1.2823) is certainly keeping the EUR bulls happy, however, the single unit is struggling above 1.30 this morning as the market seems reluctant to take on resistance. System buying has the EUR trading on top of its session highs trying to squeeze the weakest of day traders who are short. Interbank now sees a slow grind higher, seeking stops to fuel this move further. Stronger resistance at 1.3070-75 is standing in the way of the recent 1.3177 highs.

Forex heatmap
Source: EUR's Ongoing Slow Grind