Storm Clouds Continue to Gather

The euro was sold to new two-month lows against the dollar following the failure of the euro area finance ministers show any progress toward an agreement on Greece or bank supervision.

News of a worse than expected German ZEW survey (expectations -15.7 vs -9.8 expected and -11.5 in September) saw the low put in.  However, news that Greece was able to raise sufficient funds in a bill auction to cover the November 16 redemption saw the euro stabilize. 

The euro found a bid near $1.2660 and there is potential in North America today to see $1.2700 or a little more.  A move above yesterday's high near $1.2740 is needed to stabilize the short-term technical tone.  

While the expectations component of the ZEW fell to snap a two-month improving streak, the current assessment measure fell for the sixth consecutive month.  This is broadly consistent with the PMI data that shows the German locomotive is stalling.  On Thursday, Germany will report Q3 GDP.  The Bloomberg consensus calls for a 0.1% quarterly expansion.  The risk is on the downside after the recent dreadful industrial production data (Sept -1.8% m/m vs expectations of -0.7%).  

From the other side of the Channel, the UK reported that October CPI rose 2.7% year-over-year from 2.2% in September.  This was well above the expectation for a 2.3% pace.   The ONS cited food and university tuition fees as culprits.  The  core rate also jumped (2.7% from 2.1%).  Tomorrow's BOE quarterly inflation report takes an extra significance.  

The BOE did not extend its gilt purchase operation last week, but by using the interest on the gilts it earns to have reduce the government's debt, Governor King acknowledged it was tantamount to a modest easing of policy (~GBP35 bln).  The rise in CPI, a potential modest rebound in housing, the funding-for-lending scheme all suggest point to a BOE that is in no hurry to extend QE.  That said, the rise in Q3 GDP was a bit of a fluke and the economy is stagnating or worse. 

Sterling was sold to fresh two-month lows, just above $1.5850, and rebounded through $1.5900 on the elevated inflation figures.  Initial resistance is seen near yesterday's high ~$1.5915.  We are more inclined to see a return to the lows than strong gains through that cap.