EURO Eases As Investors rethink ECB rate hike prospects

The euro drifted lower as investors continued to scale-back European Central Bank rate hike expectations. It did however, get a fleeting lift from stronger-than-expected German data. The key Ifo business climate index declined for the third month in a row, easing to 104.9 in September from 105 in August. The headline index has been easing since it hit a 15-year high of 106.8 in June.

Investors greeted the news by buying euros but there was not enough momentum to push the single currency higher by any significant margin. Given that the outcome was only slightly above consensus, the data is unlikely to have a lasting impact.

Concerns about slowing US growth, the strengthening euro, elevated energy prices, and the upcoming VAT hike in Germany will continue to put downward pressure on the Ifo in the months ahead.

Euro zone rate expectations are starting to recede. This is probably a reaction to the drop in oil prices which should in turn drag euro zone inflation well below the European Central Bank's 2 pct target rate."ECB inflation hawks must be a lot less worried than they were. Softer inflation data will ensure the ECB sticks to gradual, 25 basis point moves,".

The dollar, meanwhile, was stuck in narrow ranges ahead of some key US data. The Conference Board's consumer confidence index is seen rebounding to 104 in September from August's 99.6. Falling energy prices have given extra cash to consumers, but the index is still expected to remain below the average level of the first half of the year.

Tomorrow, market attention will be on US durable goods orders and new home sales.
That aside, markets will also be keeping a wary eye on US Treasury Secretary Henry Paulson's meeting with Charles Schumer and Lindsey Graham, the key sponsors of legislation that would impose penalty tariffs of 27.5 pct on all Chinese products coming into the US unless China goes further to revalue its currency.

The pound held steady despite a survey showing that wage deals in the UK remain at subdued levels. Markets are holding steady to predictions that the Bank of England will put up interest rates again in November, to 5.00 pct from 4.75 pct. The central bank hiked the benchmark rate by a quarter point to 4.75 pct in August.