As commodities continue to overwhelm financial assets, more attention is being paid to the interrelationship between prices of fuel and metals, specifically oil and gold. The former is rallying on generous supply and demand forces while the latter shining due to rising global inflation. But as the gold-oil ratio stands at half its 35-year average of 15, a rebound in the ratio becomes increasingly inevitable, particularly given the current market landscape in interest rates, the US dollar and economic growth.

Ever since the dollar-gold convertibility was suspended in 1973, there have been five notable occasions in which the gold-oil ratio reached a bottom, coinciding with falling (or negative) 10-2 yield spreads, a peaking fed funds rate, a falling dollar and eventually falling GDP growth.

Case 1: In Autumn 1979, the gold-oil ratio dropped to 12.5 as gold and oil prices increased in unison, coinciding with a peaking fed funds rate at 15% and a falling dollar. That market situation preceded the 1980 recession of Q2 and Q3 of that year.

Case 2: In summer 1981, the gold-oil ratio dipped to a 4-year low of 11.4 amid plummeting gold and stable oil, prevailing along with a 19% fed funds rate. A 4% decline in the dollar followed in the subsequent quarter and a recession in Q4 1981- Q1 1982 ensued thereafter.

Case 3: In November 1985, the gold-oil ratio bottomed at 10.6 in the midst of relative stability in both the metal and the fuel, coinciding with a peaking fed funds rate of 8.0%. The dollar was in the midst of a 10% correction, while GDP growth slowed in Q4 1985 before bottoming to a 4-year low in Q2 1986. Unlike in the previous two cases, GDP growth avoided a contraction partly due to the offsetting positive effects of the 1986 oil price collapse following OPEC’s decision to lift production.

Case 4: In November 1990, the gold-oil ratio reached a 5-year low of 10.6 as soaring oil prices reacted to Iraq's invasion of Kuwait earlier that summer. As the Fed cut rates, the dollar lost 5% since the August invasion and the economy fell in the 1990-91 recession.

Case 5: In November 2000, the gold-oil ratio hit a record low of 7.7 reflecting a rally in oil and stable gold prices while the fed funds rate peaked at 6.50%. Unlike in the above cases, the dollar was on an upward course, in the midst of a 2-year rally, but GDP growth did contract in three of the five quarters between Q3 2000 and Q3 2001 before shedding 1.4% in Q3 2001. Although the contractions were not consecutive, the slowdown fit into the definition of a recession by most economists.

The most cogent conclusion to be drawn from the above dynamics is that a bottoming in the gold-oil ratio has mostly accompanied a peak in short-term interest rates, which was later followed by rate cuts. The other prominent aspect of the relationship is the subsequent growth slowdown. Recessions were triggered in 4 out of the 5 cases, with the exception of case 3 (Q4 1985) due to the positive growth implications of the 1986 oil price collapse.

The Case Today

As the gold-oil ratio drifts near its record low handle of 7.0 --less than half its 35-year average—a reversal could be in the cards, which would bring about the aforementioned repercussions of peaking interest rates, weakening dollar and slowing growth. Considering the gloomy prospects shaping the supply-demand dynamics of oil, a redress in the gold-oil ratio will require a more forceful rally in the metal. The prospects of doing so are possible. Gold’s surge to 18-year highs and all time highs in dollar terms and euro respectively terms reflects the “secular” bull market in the metal. The rise in energy prices is prompting a vote of no-confidence in the world’s major central banks and their currencies. Inflation rates have already exceeded the ceilings/target levels mandated by the European Central Bank and the Bank of England, while testing the limits of the Federal Reserve’s tolerance zone. As these institutions appear to be chasing inflation, rather than staying ahead of it, investors become more inflation averse and grow increasingly lured to hard assets such as precious metals.

Looking at the current inter-market dynamics of the dollar, yield spreads and short-term rates—as well as the growth outlook, we can assess the makings of a rebound in the gold-oil ratio, similar to the past 5 scenarios. In each of those cases, a bottoming in the gold-oil ratio was mostly accompanied by a peak in short-term interest rates, which was later followed by Fed easing. Indeed, futures markets are pricing three more quarter-point rate hikes towards a 4.50% peak. Whether the Fed pauses before the futures market expects it or not, markets are certain that the peak in interest rates is around the corner. An easing campaign in H2 2006 cannot be ruled out.

The other recurring aspect throughout the five cases of a pick up in the gold-oil ratio was the subsequent slowdown in economic growth. Consumers’ contribution to GDP growth has already halved between Q4 2003 and Q2 2005. The retreat in growth is even more plausible today amid the Fed’s tightening combined with higher energy prices and mounting heating bills.

The final piece of the scenario is the course of the dollar. In all but one of the 5 cases, the dollar was on the decline. Today, the dollar’s upward course is expected to begin to fade in late Q4 when markets obtain better visibility as to when the Fed’s tightening comes to an end. Increased certainty that a 4.5% fed funds rate will be the peak is likely to help trigger unwinding of dollar longs especially amid emerging hawkishness from Europe and Asia. The dollar rise could even be sharply reversed in the event of an expected yuan revaluation against the dollar in late Q4. And in light of further currency action from Beijing, markets should expect further FX rebalancing in global central bank reserves into non USD-currencies.

A final dynamic seen sustaining gold prices is the US administration’s tax cuts extension beyond 2010, which could evoke its own vote of no confidence by the markets as Hurricanes recovery costs are seen reaching the $200 billion mark. Negative dollar dynamics, peaking interest rates and slowing economic growth are a fitting component for the natural redress in the gold-oil ratio.

4:30 am October CBI Industrial Trends Survey (exp -26, prev -27) 1:45 pm Fed Chairman Greenspan Speaks 4:00 pm Bank of Canada Gov Dodge Speaks 7:50 pm Sep Large Retailers' Sales y/y (exp -1.9%, prev -3.0%)

The dollar licks its wounds in the aftermath of Tuesday’s double blow of slumping consumer confidence in the US and higher than expected business confidence in Germany. The pullback in US stocks and sell-off in US treasuries in light of expected increase in oil prices is failing to stabilize the greenback’s decline. A lower than expected drop in Japan’s trade surplus is capping USDJPY near the 115.20s, while a weaker than expected CPI from Australia is pressuring Aussie towards the 75.40s.

Just another euro bounce?

Unlike the euro’s 2-cent rally of Oct 6, Tuesday’s 1.5 cent move in the single currency could show more durability. At first, the Oct 6 move, albeit the biggest in 3 years, began to reverse within 10-12 hours after the initial rally. Tuesday’s move to the 2-week high of $1.2116 remains relatively more lasting just below the $1.21 figure. More importantly, the fundamental underpinnings of Tuesday’s move deserve a closer look. The contrasting reports of eroding US consumer confidence (biggest drop in 15 yrs to 2- year lows) and improved business sentiment in Germany (highest IFO reading in 5 years) suggest that US consumers remain apprehensive in light of soaring heating costs in the winter season, while German businesses may have seen the bottom in their economy. News that US military deaths in Iraq have hit the 2,000 mark brings forth the debate over the benefits of the US involvement in Iraq and the merit of the constrained conditions of the US fiscal balance. Attention to the war in Iraq re-emerged after yesterdays’ 3 blasts in 2 Baghdad hotels housing foreign reporters and contractors. But back to economics. US consumer confidence dipped to fresh two-year lows in October reaching 85 from September’s 87.5, while sales of previously owned homes in September remained flat, suggesting a peak in the housing market alongside falling consumer confidence—which has long been an oft-mentioned combination in the top list of any negative macro-scenarios.

Going back to the IFO survey of business sentiment, the survey’s climate Index pushed up to 98.7---the highest in 5 years. The situation index pushed by 2.5 points to 98.9 while the expectations index accumulated 3 points. The survey was organized after the resolution in this month’s election impasse, and clearing doubts over how power will be divided in the Eurozone’s largest economy. We saw last week how the Oct ZEW Indicator of Economic Sentiment rose following the resolution in the election. Whether the rebound in the indices reflects a relative improvement after the election impasse or is a greater showing of economic expansion remains to be seen. The IFO climate index is 4 points above its 7 year average of 94.1 while the Oct US consumer confidence is 22 points below its 7-year average. The IFO survey has not only served as a useful indicator for recoveries and slowdowns in German growth, but has also garnered major moves that have been instrumental in triggering lasting bounces in the euro.

Interestingly, this second monthly sub-100 reading in US consumer confidence comes 2 weeks after a 13-year low in the October University of Michigan Sentiment Survey. We have seen that the contribution to GDP had slowed from 4.1% in Q3 2003 to 2.1% in Q2 2005-- well before the 30% increase in gasoline prices between July and mid September. Looking ahead, we expect little scope for a notable recovery in consumer confidence—let alone spending—in light of the Fed’s insistence to tighten further and amid higher energy prices and mounting heating bills. The EIA project an average of $350 increase (48%) in natural gas for household heating this winter compared to last year; and an average increase of $378 (32%) in heating oil. Those using electricity can expect an average increase of $38 (5%) in their heating bill.

Euro’s drops further below the $1.21 figure is testing the 1.2060s support, below which comes $1.2040—the 50% retracement of the 1.2204-1.876 drop. Resistance seen standing at $1.2120, followed by $1.2147—the 38% retracement of the major decline from the 1.2583 high to the $1.1874.

USDJPY stabilizes at 115

A smaller than expected fall in Japan's Sept trade surplus to 956.9 billion yen is helping the yen sustain its Tuesday’s gain. The 14% rise in exports to China over the previous year is also backing credibility to the 9.5% rise in China’s Q3 GDP, which had been suspected to be excessive on the upside. Signs of ongoing expansion in China are usually yen positive as they boost chances of a subsequent yuan revaluation against the dollar. Especially positive about today’s trade figures is that it showed signs of stability following the 80% drop in the August surplus.

USDJPY’s recovery is seen capped at 115.40, followed by 115.60-65. Support starts at 114.90 —38% retracement of the 113.00-115.96 rally, followed by 114.50—50% retracement of the said move. Key foundation holds at 114.10.

Cable loses half of Tuesday’s gains

Cable trades at the $1.7750s, losing 50% of its 2-cent rally to the $1.7866 high. This morning’s CBI survey is expected to show modest improvement in October. Any upside surprise could regenerate favor in sterling on the basis of less than expected Bank of England easing ahead. Support starts at $1.7730, followed by $1.7670--38% retracement of the 1.7430-1.7798 rally. Subsequent support stands at $1.7610—50% retracement of the said move. Upside capped at 1.7820, followed by 1.7870.

The dollar was punished across the board on a combination of slumping consumer confidence in the US and higher than expected business confidence in Germany. The dollar lost more than 1.5 cents against the euro hitting a week low of $1.2116, while dropping a full yen to an 8-day low at 114.60. The contrasting reports of eroding US confidence and improved business sentiment in Germany suggests that US consumers remain apprehensive in light soaring heating costs in the winter season, while German businesses may have seen the bottom in their economy. News that US military deaths in Iraq have hit the 2,000 mark brings forth the debate over the benefits of the US involvement in Iraq. Attention to the war in Iraq has been re-emerged after yesterdays’ 3 blasts in 2 Baghdad hotels housing foreign reporters and contractors.

US consumer confidence dipped to fresh two-year lows in October reaching 85 from September’s 87.5, while sales of previously owned homes in September remained flat, suggesting a peak in the housing market. The decline in the September consumer confidence was the largest in more than 15 years. The figure is well below its 5-year average of 98.4

Despite negative US data, US treasuries fell across the board on expectations that the Federal Reserve will remain on its inflation fighting path especially that the pro-inflation target Ben Bernanke will become the central bank’s new Chairman. Yields on the 2-year note rose to their highest in 5 years at 4.32% while their 10-year counterparts gained 9 bps to 4.53%

Euro rallies as IFO hits 5-year high

Euro bulls got more than they bargained for when they currency gained more than 150 pips against the dollar following a 2.7 rise in the Oct IFO’s climate Index to 98.7---the highest in 5 years. The situation index pushed by 2.5 points to 98.9 while the expectations index soared by 3 points. The survey was organized after the resolution in this month’s election impasse, which led to better clarity as to how power will be divided in the Eurozone’s largest economy. We saw last week how the Oct ZEW Indicator of Economic Sentiment rose following the resolution in the election. Whether the rebound in the indices reflects a relative improvement after the election impasse or is a greater showing of economic expansion remains to be seen. The IFO climate index is now standing above its 7 year average of 94.1.

Euro’s bounce fell just short of the Oct 17 high of $1.2120. Resistance seen standing at $1.2147—the 38% retracement of the major decline from the 1.2583 high to the $1.1874. The retracement is 5 pips below the 100-day MA. We expect the euro to retreat to interim support at $1.2060, backed by $1.2040—the 50% retracement of the 1.2204-1.876 drop.

Yen’s biggest rise in 7 weeks

USDJPY mounted its biggest increase against the dollar in nearly 2 months, gaining well over a full yen to 114.60 amid signs of deteriorating US consumer confidence in light of soaring energy costs and higher interest rates. And the fact that US home sales stopped increasing in September—even though that figure was the second highest of the year—maybe starting to affirm preliminary talk of a cooling in the housing market. Yen traders are also aware of this week’s statements from the Peoples’ Bank of China indicating the possibility of further yuan revaluation and China’s readiness to handle higher interest rates. We stick with our forecast for a 1.7-2.1% revaluation in the yuan versus the dollar in the second half of the currency quarter.

Traders turn to Japan’s Sep trade surplus figures at 7:50 pm NYT expected down 30% to 850 bln yen, but would be an improvement from the 80% drop seen in August. The BoJ’s CPI is also due this evening, expected down 0.6%.

Breaking below the 114.90 support—38% retracement of the 113.00-115.96 rally, USDJPY eyes interim support at 114.50—50% retracement of the said move. Key foundation holds at 114.10. Any rebound seen capped at 115.20, with selling pressure emerging at 115.55-60.

Loony tests 3 week channel after CPI

The USDCAD’s 1.2 cent drop following a 3.4% y/y increase in Sep CPI and the greenback’s broad decline came as a potent catalysts for the pair to test its 3-weeh channel support. Core CPI rose 1.7%, meeting expectations, but the headline figure was in line with the Bank of Canada’s inflation projections. This means that the figures are also consistent with the central bank’s intentions to further tighten monetary policy in Q4. We expect rates to be raised to 3.25% this year from their current 3.00% before peaking at 3.75% in Q1 2006.

Governor of the Bank of Canada David Dodge reiterated the Bank’s projections and its plans for further rate hikes today when he stated:”… some further reduction of monetary stimulus will be required to maintain a balance between aggregate supply and demand over the next four to six quarters, and to keep inflation on target”

USDCAD sees the channel support at 1.1720, which is also the 61.8% retracement of the 1.1586-1.1922 rally. Key support stands at 1.1680. Upside capped at 1.1790—the 38% retracement of the said move, followed by the 1.1820—100 day MA.

4:00 am German Oct IFO Business Climate(exp 96.1, prev 96) Oct IFO Current Conditions(exp 96.4, prev 96.4)Oct IFO Business Expectations (exp 95.6, prev 95.5) Can Sep CPI y/y (exp 3.3%, prev 2.6%) Sep Can Core CPI y/y(exp 1.7%, prev 1.7%) 10:00 am US Sep Existing Home Sales (exp 7.2 mln, prev 7.29 mln) 10:00 am US Oct Consumer Confidence (exp 88.0, prev 86.6) Bank of Canada Gov Dodge Speaks

The dollar is a little firm across the board after firming in afternoon NY trade following pres Bush’s nomination of Ben Bernanke to replace Alan Greenspan as Federal Reserve Chairman. Bernanke’s experience at the White House and his time at the Fed as well as his deomonstrated intellectual acumen have evoked a positive reaction in stocks and the dollar. His adherence to inflation targeting raises the question of whether he is as resilient in combating inflation as he was in combating deflation. It can be indicated that pursuing explicit inflation targeting could deprive the central bank of its multi pronged policy of using an array of inflation-related figures at the prices and wages level. Mr Bernanke said last year that: “that the FOMC's credibility and clarity would be enhanced if it announced the inflation range with which it would be comfortable in the medium term. In particular, policy would be both more coherent and more predictable if FOMC members shared an explicit common objective for inflation at the medium-term horizon”.

Most likely, Bernanke will incorporate a quantitative inflation goal into the Fed’s goal of employment maximization and price stability that would be used as a complement rather than a sole objective.

This morning’s double dosage of sentiment data from Germany’s Oct IFO survey and the US Sep consumer confidence should have a vital bearing on EURUSD. While the monthly average of the IFO’s Climate component’s stood stands at 2 points above the 7 year average of 94.1, the US consumer confidence has to recover from September’s 2-year low. Markets will also look for US consumers’ responses on the ease of finding jobs and to what extent are jobs plentiful.



Euro awaits IFO

Euro bulls are hoping to see at least a modest recovery in the Oct Ifo survey following the resolution in this month’s election impasse, which had a positive on last week’s release of the Oct ZEW Survey. The ZEW Indicator of Economic Sentiment rose to 39.4 points from September’s +38.6 points in September. Just like the ZEW figure remained above its istorical average of +34.3 points, the IFO’s Climate component was last 2 points above the 7 year average of 94.1.



Today’s meeting between the European Trade Union Confederation and the European Central Bank’s Exec Board should also be important as the former threatened that his 60 million strong organization would give a "very hostile reaction" if basic rights such as collective bargaining and the right to strike were damaged. This could be a short-term positive for the euro as it may encourage a rate hike by the ECB.

Euro interim resistance stands at $1.2040—the 50% retracement of the 1.1876-1.2204 rise. Subsequent target follows at $1.2060. Support starts at $1.19200, backed by $1.19 and 1.1860.

Loony awaits CPI

Loonie could be biddish again as it awaits this morning’s CPI, where the headline could be as high as 3.3% y/y with a core rate at 1.7%. The currency broke a 3-day gains last week after the Bank of Canada lowered its 2006 growth forecast but any declines are limited in light of further rate hikes ahead.

The Bank of Canada raised its 2005 growth forecast 2.8% from July’s forecast of 2.7%, but lowered its 2006 forecast to 2.9% from 3.3%. It said inflation 'probably spiked above 3.0 pct in September' and would likely hold at a 3 pct pace for the rest of 2005 and the first half of 2006 before returning to the 2.0 pct target in the second half.

USDCAD sees interim support at 1.1820, followed by 1.1775. Upside starts at 1.19 folowed by 1.1930, which would be a 3 week high.

Stocks and bonds rallied today at pres Bush’s nomination of Ben Bernanke-- his top economic adviser-- to replace replace Alan Greenspan as Federal Reserve Chairman. But the dollar did not perform as well as stocks and bonds markets. The currency as initially hurt by three blasts in 2 Hotels in Baghdad--where reporters and contractors were staying—killing at least 6 people.

But the dollar’s moves in the aftermath of the Bernanke nomination were too minor to attribute to the Fed’s nomination. At the outset, the dollar reaction should be positive due to Bernanke's experience at the Fed as well as his intellectual capacity. His adherence to inflation targeting, however, has mixed prospects for the currency. At the outset, pursuing explicit inflation targeting policy could deprive the Federal Reserve of its multi pronged policy of using an array of inflation-related figures at the prices and wages level. If a Bernanke-led Fed adopts a more clear-cut inflation target, then it could run the risk of overfocusing on inflation at the possible expense of overlooking the Fed’s objectives of maximum employment and stable prices”. In the event that core inflation continues to threaten the 2.0% figure, then we can expect a positive dollar reaction on the grounds of further Fed tightening. But in the event of the disinflationary or deflationary conditions such as in 2003 when Bernanke suggested the need for the Fed to throw money from Helicopters, the downward impact on the dollar is obvious.

Treasury yields retreated with the 10yr yield off nearly 4 bps to 4.45%. The 3 major equity indices rallied by 1.6%.

Markets turn to tomorrow’s release of the September consumer confidence report and Germany’s IFO survey, which will be assessed as a potentially contrasting release for the dollar and the euro. While the monthly average of the IFO’s Climate component’s stood stands at 2 points above the 7 year average of 94.1, the US consumer confidence has to recover from September’s 2-year low.

USDJPY turns

The dollar’s decline proved to be the product of earlier yuan related remarks from Beijing and Tokyo, the blasts in Iraq where many foreign reporters and contractors stay and the decline in oil prices below the $60 level. PBOC advisor Yu who said earlier he expected further changes in the currency regime, supporting the overall rhetoric from the Bank’s chief Rhongjo who echoed these remarks. The statements from MoF’s Watanbae pressuring china for further currency action helped briefly weigh on the dollar on the rationale that another dollar/yuan revaluation would boost the Japanese currency against the dollar as it allows Japan’s trading partners to lift up their own currencies. We stick with our forecast for a 1.7-2.1% revaluation in the yuan versus the dollar in the second half of the currency quarter. Last week, yen shorts posted their 6th consecutive weekly gain reaching 66,641 contracts, the highest since May 1999. Any more of these aforementioned remarks on the yuan could help cap the dollar

Short-term support seen tested at 114.90—50% retracement of the 113.74-115.96 rally. A breach below 114.60 sees key support at 114.20. Upside capped at 115.55-60, followed by 115.85-90.

Euro unable to break trend line

EURUSD pushed higher but failed to hold to most of its gains after pulling back nearly half a cent off its 1.2020 high. The latter is the trend line resistance extending from the 1.2587 September high. We see interim resistance at $1.2040—the 50% retracement of the 1.1876-1.2204 rise. Nest target at 1.2060. Tomorrow’s release of the Oct IFO survey from Germany and the Oct consumer confidence from the US should underpin activity. Fed Chairman Greenspan’s speech on Thursday will be scrutinized for any more remarks on growth concerns. But the week’s key release will be the advanced US Q3 GDP release on Friday, expected to produce a rate of as much as 3.7%.

Also tomorrow is the meeting between the European Trade Union Confederation and the European Central Bank’s Exec Board should also be important as the former threatened that his 60 million strong organization would give a "very hostile reaction" if basic rights such as collective bargaining and the right to strike were damaged. This could be a short-term positive for the euro as it may encourage a rate hike by the ECB.

Euro futures dropped 83% to 855 contracts last week after a 352% increase in the prior week. Despite the declines in bullishness, euro remained in positive territory for the second straight week following three consecutive weeks of net selling
A renewed break below the $1.1930 support, sees foundation at $1.19 and 1.1860.

Dollar remains firm across the board in mid morning European trade following the late Friday session rally which was reported to be related to Homeland Investment Act flows. But the dollar is a little off against the yen following remarks from a Peoples’ Bank of China official saying further changes in the nation’s currency regime were lie ahead and that China was not afraid of a stronger yuan. Separately, Japanese Finance Ministry’s Watanabe said the trial period of China’s currency adjustment had reached its last stage, urging Beijing to deliver further revaluation to its currency.

The week’s key US data reports will be Tuesday’s release of the September consumer confidence report, Thursday’s new home sales and durable goods orders for September and Friday’s advanced Q3 GDP release. Germany’s Oct IFO, Japan’s Sep trade and Aussie Sep CPI on Tuesday and Friday’s Oct CPI from the Eurozone should be of importance.

Dollar still dominates among speculators

The dollar garnered fresh interest among futures traders as the Fed’s inflationary rhetoric extended dollar longs in the expectation of accumulated yield. The only exceptions were the Canadian dollar and the Swiss franc

Euro futures dropped 83% to 855 contracts after a 352% increase in the prior week. Despite the declines in bullishness, euro remained in positive territory for the second straight week following three consecutive weeks of net selling. Yen shorts posted their 6th consecutive weekly gain reaching 66,641 contracts, the highest since May 1999. Sterling shorts posted their third straight week against the dollar, falling 10% to 21,050 contracts. This was the highest nest short week for cable since mid July. Aussie futures fell 35% to 11,062 contracts, the lowest in 7 weeks

The loonie continues to be the only currency outperforming the dollar in the futures market as it remains in net long territory since June. Since then, the re has been only 6 declines in the loonies net long position. Swiss shorts stabilized by 25% to 30,982 contracts after 4 consecutive weekly increases. The ensuing hawkishness from the Swiss National Bank and its concern with the inflationary effects of a weal franc have contributed to the currency’s ascent. This may also suggest that the currency is nearing its days of being sold as a funding currency for carry trade plays.

USDJPY steadies despite Yuan comments

USDJY had an early dip to the 115.50s on a combination of comments favoring further yuan revaluation by PBOC advisor Yu who said he expected further changes in the currency regime, supporting the overall rhetoric from the Bank’s chief Rhongjo who echoed these remarks. The statements from MoF’s Watanbae pressuring china for further currency action helped briefly weigh on the dollar on the rationale that another dollar/yuan revaluation would boost the Japanese currency against the dollar as it allows Japan’s trading partners to lift up their own currencies. We stick with our forecast for a 1.7-2.1% revaluation in the yuan versus the dollar in the second half of the currency quarter.

USDJPY faces interim resistance at 115.80, followed by 116.00. Any renewed sell-off seen stabizling at 115.40. Key foundation stands at 115.10.

Euro struggles below $1.20

Euro struggles to regain the $1.20 figure and is now testing the 1.1920s follwing Friday’s 1-cent drop in late trade. Demands of a 4% rise by German metal unions in the upcoming wage talks should prompt further hawkishness by the ECB. Currently, EURIBOR markets are pricing about a 40% chance of a 25-bp rate hike before year-end, but the constant anti-inflation talk by Fed speakers has overwhelmed dollar bears. Tomorrow’s release of the Oct IFO survey from Germany and the Oct consumer confidence from the US should underpin activity. Fed Chairman Greenspan’s speech on Thursday will be scrutinized for any more remarks on growth concerns. But the week’s key release will be the advanced US Q3 GDP release on Friday, expected to produce a rate of as much as 3.7%.

Tuesday’s meeting between the European Trade Union Confederation and the European Central Bank’s Exec Board should also be important as the former threatened that his 60 million strong organization would give a "very hostile reaction" if basic rights such as collective bargaining and the right to strike were damaged. This could be a short-term positive for the euro as it may encourage a rate hike by the ECB.

EURUSD’s tests the $1.1930 support, which could pave the way for 1.19 and 1.1860. Upside seen limited at $1.1970 followed by $1.2030.

Cable eyes $1.7640s

A 0.1% drop in UK housing prices as measured by the Hometrack did not impact the pair which had a solid 4-cent rally last week to the $1.78 figure on a less dovish than expected MPC minutes. The 0.4% slowdown in Q3 GDP is not bearing any pressure on the pair. Traders turn to Wednesday’s CBI industrial trend survey. Support tests1.7670--38% retracement of the 1.7430-1.7798 rally. Subsequent support stands at $1.7610—50% retracement of the said move. Upside capped at 1.7670, followed by 1.77.