Euro Steady, Pound Weakens

Economic news overnight was supportive of the euro as the German GFK Consumer Confidence report hit a 5 year high at 8.8 versus 8.6 expected. Euro-zone M3 data also reported above forecast expanding at 8.2% rate versus 7.5% consensus.

The money supply growth continues to support ECB's position that liquidity in the Euro-zone remains excessive and is likely to maintain the monetary policy makers hawkish stance on tightening even if inflation data going forward proves tame. The news however had little immediate impact on the pair as traders essentially squared positions ahead of the Durable Goods and New Home Sales releases scheduled for later in the day.

Across the pond in UK price action was considerably more active as dovish comments by MPC member David Blanchard caught traders off guard. Mr. Blanchard stated that the August rate hike was actually a close call and noted that in his opinion the risks of a slowdown overshadowed the risks of inflation. His comments undermined the idea of additional rate hikes by the BOE - something that the majority currency market players were convinced would happen soon. As a result the pound tumbled nearly 100 points off sessions highs.

However, news later in the morning from the Consortium of British Industry on September's retail trade surprised to the upside and stemmed the tide of selling. CBI printed at 14 versus 12 expected - a 21 month high. Furthermore, expectations for October firmed as well reaching a reading of 16. Altogether the data counteracted Mr. Blanchard's pessimism indicating that UK consumer spending remains robust as wages hold steady, employment improves, and the housing markets continue to accelerate.

Finally, Switzerland released its most important economic indicator of the month the KOF survey of leading economic indicators and it came in slightly weaker than expected at 2.32 versus 2.42 consensus. This is the second month in a row of month over month declines.

Though hardly a negative (the index remains near multi year highs) the deceleration of momentum bodes poorly for any Swissie bulls still counting on a 50 basis point hike from SNB. With very little reason to be aggressive on the rate front, the franc is likely to continue to suffer from interest rate differential disparity and will only rally if the outlook for global growth becomes markedly more defensive.