Euro Firms Ahead Of G7 Meeting, Will Governments Guarantee Interbank Lending?

Daily Forex Fundamentals | Written by DailyFX | Oct 10 08 10:18 GMT |

Talking Points Japanese Yen: USDJPY Bounces From 98.00 Pound: Finds Support at 1.6800 Euro: G7 Meeting Ahead US Dollar: Trade Report On Tap Euro Firms Ahead of G7 Meeting, Will Governments Guarantee Interbank Lending? After a test of 1.3500 the Euro bounced from support rallying over a 100 bps. The pair would find resistance at 1.3650 and has started to consolidate ahead of the upcoming G7 meeting. Finance ministers and central bankers from the U.S. Japan, Germany, U.K., France, Canada and Italy will meet in Washington D.C. today to discuss what other measures can be taken to help stem the crisis. It is the first meeting of global policy makers since the current crisis began to heighten a month ago. A statement will be released at 6pm where some sort of more unified effort is expected to be proposed. U.S. Treasury Secretary Hank Paulson and ECB President Trichet are also scheduled to speak after the meeting. Speculation is that the one of the main topics to be discussed at the G7 meeting is the possibility of governments guaranteeing interbank lending in an attempt to bring down Libor rates. The interbank lending rate has skyrocketed despite the coordinated rate cut and the liquidity efforts undertaken by the various governments. The failure of the rate to ease has perpetuated the current freefall in equities as the Nikkei dropped 9% today following the U.S. markets dropping to their lowest levels in five years. The major pairs have started to consolidate ahead of the potential actions from the world's top policy makers. Fundamental data from the Euro-Zone was better than expected as French Industrial production declined 0.4% in August against expectations of -0.8%. Nevertheless, activity fell from 1.4% in July as the region's second biggest economy is headed toward a recession. Meanwhile, Italian industrial production unexpectedly improved 1.4% against expectations of a 0.6% gain. These results and the string of better than expected data from Germany, the region's largest economy, may be enough to keep the ECB on hold over the near-term following their 50 bps cut. Market participants are still pricing in 128 bps worth of rate cuts over the next twelve months. These expectations have continued to weigh on the EURUSD despite recent hawkish rhetoric from ECB officials. President Bush is scheduled to speak today at 10 Am in an effort to assure Americans that the U.S. government is doing everything in its power to stem the current crisis which could add dollar support. However, we may see little volatility ahead of the results of the G7 meeting. The collapse of equity markets is being fueled by panic and risk aversion, which is evident by the strength of the Yen crosses. However, outside of the USDJPY the greenback has continued to strengthen against other major currencies. The two causes for this recent strength have been the belief that the U.S. is better positioned to emerge from this crisis and the flight to the safety of U.S. treasuries. Therefore, next week we may see the dollar weaken if risk appetite increases. However, the decline may be short lived as investors view the U.S. as the most attractive market and stocks and real estate at current valuations will be very attractive. The U.S. Trade Balance deficit is expected to have narrowed as the value of oil exports have declined, which will be overshadowed by the other events scheduled today. DailyFX Disclaimer Investment in the currency exchange is highly speculative and should only be done with risk capital. Prices rise and fall and past performance is no assurance of future performance. This website is an information site only. Accordingly we make no warranties or guarantees in respect of the content. The publications herein do not take into account the investment objectives, financial situation or particular needs of any particular person. Investors should obtain individual financial advice based on their own particular circumstances before making an investment decision on the basis of the recommendations in this website. While we try to ensure that all of the information provided on this website is kept up-to-date and accurate we accept no responsibility for any use made of the information provided. All intellectual property rights are the property of Daily FX. Daily FX and its affiliates, will not be held responsible for the reliability or accuracy of the information available on this site. The content herein is provided in good faith and believed to be accurate, however, there are no explicit or implicit warranties of accuracy or timeliness made by Daily FX or its affiliates. The reader agrees not to hold Daily FX or any of its affiliates liable for decisions that are based on information from this website. Daily FX highly recommends that before making a decision, the reader collects several opinions related to the decision and verifies facts from at least several independent sources.