Euro Above 1.38 On Reports That EFSF Deal Is Near

Reports that French/German deal on EFSF is near improves optimism, BOE MPC minutes show that GBP 50-100 bln was considered for asset purchases, Eurozone current account deficit narrows. Market turns to CPI, housing data and Canadian leading indicators index.

Overall sentiment improved and higher yielding currencies are stronger against the USD on the back of reports that an agreement between Germany and France is near. President Sarkozy told his cabinet that 10/23 summit will deliver a plan to recapitalize banks and will boost the EFSF.

However, the market may be getting too optimistic as Chancellor Merkel reiterated today that the summit will be an important but not the final step in the debt crisis resolution. She also said that the solution will require tough and long-term work.

Reports that boosted the common currency yesterday – that the EFSF will reach 2 trillion Euros – were denied but the market may be disappointed should the summit conclude with the EFSF reaching anything less then 2 trillion. It is also important to keep in mind the staggering number of reports coming from the Eurozone that were later denied or turned out to be inaccurate.

BOE MPC minutes revealed that the considered size of asset purchases was between GBP 50 and 100 bln and that no member voted for a rate change. Some members noted that due to substantial downside risk a larger than normal stimulus may be needed. GBPUSD first sold off on the news but has since recovered and trades firmly above pre-announcement levels.

In Europe, Current account deficit has narrowed to EUR -5 bln in August from previous EUR -6.8 bln.

The New York session starts at 8:30 am with September annual CPI that is seen at 3.8%, unchanged from August. Annual core print is expected to tick up to 2.1% from previous 2.0%.

Housing market data is expected to be mixed today. Building permits are anticipated lower at 610K in September from 625K and housing starts are seen higher at 590K from 570K residential buildings.

The statistics office in Canada releases its September Leading indicator index also at 8:30 am and it is expected to improve to 0.2% from previous 0%.

Federal Reserve's Beige book that describes economic conditions in each of the 12 FED's districts is due at 2:00 pm ET.

Patrik Urban