Talking Points

• Soft Euro Zone Growth Data to Amplify Debt Crisis Fears
• UK Inflation Data Set to Reinforce the Case for QE Reboot
• RBA Minutes Neutral, Markets Still Bet on Rate Cuts Ahead
• US Dollar, Yen Outperform Overnight Amid Risk Aversion

A busy docket of headline European economic data is in focus, with worrying results likely to fan the flames of risk aversion as traders are reminded that sluggish growth inherently undermines the ability ofEuro Zone governments to trim deficits by stunting tax receipts. Preliminary third-quarterGross Domestic Product figures from Germany as well as the currency bloc as a whole are on tap, with both reports expected to annual output growth rates slowed to the weakest since the first three months of 2010, which marked the first period of positive growth since the Great Recession. Meanwhile,Germany’s ZEW survey is forecast to yield the lowest investor confidence reading since November 2008.

Turning to the UK, October’sConsumer Price Index data set is expected to put the annual inflation rate at 5.1 percent, marking the first decline in four months. The outcome will reinforce October’s decision to re-launch quantitative easing by theBank of England, setting the stage for the publication of the central bank’s quarterlyInflation Report tomorrow, where traders will look for clues on what conditions need to be met for the central bank to add to its initial increase of £75 billion in asset purchases two months ago.

TheUS Dollar andJapanese Yen outperformed overnight as Asian shares followed Wall Street lower, stocking demand for the go-to safe haven currencies. The MSCI Asia Pacific regional benchmark stock index fell 0.9 percent after yields on Italian bonds jumped higher at yesterday’s 5-year debt auction. Rates rose to an average of 6.29 percent versus 5.32 percent at a sale of comparable paper a month ago, hinting Europe’s third-largest economy may not be able to service its obligations as interest payments soar. Signs that core European countries may abandon the periphery to their fate didn’t help matters either after German Chancellor Angela Merkel’s CDU party voted to offer Euro-area states a mechanism to “voluntarily” exit the currency bloc.

Minutes from October’sReserve Bank of Australia monetary policy meeting showed the central bank was pushed by into an interest rate cut by the unraveling situation in the Euro Zone, which was identified as the “most significant risk” to growth. Core economic metrics appeared relatively comfortable, with inflation consistent with the 2-3 percent target and the pace of overall GDP expansion “close to trend” over the next 1-2 years. On balance, the RBA begrudgingly agreed on “modest easing” while saying the case could have been made to keep rates on hold. While this certainly doesn’t scream of dovish sentiment, the markets continue to see substantial easing in the cards for Governor Glenn Stevens and company, pricing in another rate cut of at least 25bps at the December 6 meeting and 145bps in reductions over the coming 12 months according to data compiled by Credit Suisse.

Asia Session: What Happened

Euro Session: What to Expect

Critical Levels

---Written byIlya Spivak, Currency Strategist forDailyfx.com

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