Euro Plunges as European Consumer, Industrial Sentiment Turns Increasingly Pessimistic

After running in to resistance at 1.3250, EUR/USD pulled back sharply throughout the day to test support at the 50 percent fib of 1.2328-1.3296 at 1.2813. The pair managed to recover above 1.2900 later in the day, but the fundamentals of the Euro-zone remain resoundingly bearish.

The European Commission reported this morning that their index of consumer confidence plummeted to a nearly 15-year low of -24 while industrial confidence dropped to match the lowest level in more than 12 years at -18. Nearly every sector in the region is suffering in the wake of restrictive monetary policy, rising unemployment, tight credit conditions, and the global economic slowdown. As a result, Friday Eurostat estimate for Euro-zone CPI will be very important.

Indeed, the figure is projected to show at 6:00 ET that inflation growth eased to a 3.2 percent pace in October from 3.6 percent. Given European Central Bank President Jean-Claude Trichet more bearish stance on economic growth and the bank participation in the October 8 coordinated rate cuts, a weaker-than-expected CPI reading could exacerbate the market speculation that the ECB will cut rates next week on November 6. We also have to consider that the Euro-zone unemployment rate will also be released at the same time and is forecasted to hold steady at 7.5 percent. Considering the dismal conditions plaguing the region economies, there is a risk that the unemployment rate will tick higher, and combined with a drop in CPI, the euro could plunge.

ECB's Weber in Rate Cut Mode, Euro-Zone Growth May Near Zero

ECB's Weber said "if the economy cools, then rates have to come down rapidly so one doesn't risk falling behind the curve". He added that "interest rates have to be appropriate for the economic environment." Weber stressed that his comments should not be seen as referring to the ECB's current monetary policy deliberations as the central bank is in its one week blackout period ahead of next week's meeting, but the comments clearly indicate that even mega hawk Weber is in rate cut mode and we now see a 50 bp cut from the ECB next week.

In addition, ECB's Bini Smaghi also signaled at " a possibility" of another rate cut at their next meeting in November. He added that the ECB is reducing rates in line with its strategy. It seems officials are this week not quite sticking to the usual black out period and continue to prepare the ground for a cut next week. We are now looking for a 50 bps move as growth is confidence is eroding rapidly.

Meanwhile, ECB's Quaden expects inflation to fall, and does not see a depression as in the 1930's. Quaden also says that he believes it would be better to regulate the financial system on a worldwide level, if not on a Europe wide level. Quaden also sees Belgian GDP growth closed to zero in 2009 than 1 percent, adding to the view that the Euro zone is slowing quickly.

Dollar, euro extends losses vs yen on stock slide

The dollar and the euro extended losses against the yen on Friday as a steep fall in Tokyo share prices renewed investor concern over riskier assets.

The dollar fell as low as 96.35 yen after hitting the day's high at 99.05 yen
on trading platform EBS. The U.S. dollar was trading at 96.50 yen, down 2.1
percent on the day.

The euro dropped 3.9 percent to 122.25 yen, sliding from the day's peak at
127.54 yen.