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The Euro has come under pressure following the Euro-Zone September consumer price report showing inflation fell for a fourth straight month allowing the ECB to remain on hold. . The

Talking Points
• Japanese Yen: Testing 20-Day SMA
• Pound: Fisher Says QE Having Impact
• Euro: Consumer Prices Fall For Fourth Month
• US Dollar: Earnings, CPI and Manufacturing Data Ahead

Euro Declines, As Falling Consumer Prices Lowers Interest Rate Expectations

The Euro has come under pressure following the Euro-Zone September consumer price report showing inflation fell for a fourth straight month allowing the ECB to remain on hold. . The 0.3% decline from a year ago in the headline reading was unchanged from August but a decline to 1.2% from 1.3% in the core component is evidence that deflationary pressure remain. Indeed, during the month prices were flat despite expectations of a 0.1% increase as gains in food costs were offset by declines in energy and housing. The ECB in their monthly bulletin stated that they expected low inflationary pressure over the medium term.

ECB governing council member Ivan Sramko was on the wires today stating that deflation isn't a concern and that the euro-zone economy may grow by 1.0% in the third quarter. The ECB forecasts GDP to drop by 3.8 to 4.4 percent this year, and recover to -0.5 to +0.9 percent in 2010. The lack of a threat of inflation has started to lower interest rate expectations for the ECB which could be a weighing factor for the Euro over the near-term. The psychological level of 1.5000 may serve as a solid resistance level, but another bout of risk appetite could push the single currency higher.

The pound was the one major to show strength against the dollar overnight which was surprising since there was zero fundamental data fro Europe's third largest economy. Support may be coming from comments made by BoE member Paul Fisher who stated that quantitative easing efforts are having an impact and that the central bank wasn't actively seeking to weaken the pound. We could be seeing some short covering as the prospect of the central bank adding to their asset purchase program shrinks. The GBP/USD is threatening the 50-Day SMA at 1.6281 where it could find resistance.

The dollar held firm overnight and is showing signs of strength despite positive equity markets which saw the Dow break above 10,000 yesterday. Strong earnings have fueled risk appetite and with Goldman Sachs and Citigroup reporting today we could get more of the same sentiment which may weigh on the dollar. The first close above the psychological level for the blue chip index in more than a year may inspire retail investors to throw their hat into the fray which could lead to a bit of irrational exuberance. U.S. CPI figures are due to cross the wires and expected to show that deflationary risks are ending with the rate of decline slowing for a second month to -1.4% from -1.5%. Policy officials have maintained that there is enough slack in the economy too offset upside risks, but the expected price growth of 0.2% during September will shorten the time table for future tightening. Latter in the day traders must be aware of manufacturing readings for the New York and Philadelphia regions which are forecasted to show a decline in activity from the month prior which could derail optimism and provide greenback support.

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To discuss this report contact John Rivera, Currency Analyst: jrivera@fxcm.com

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