Pound Finds Support Despite Drop In Exports, Are More Losses Ahead?

The Pound remained under pressure through overnight trading as it fell to as low as 1.3655 after the Chinese trade report showed a 25.7% drop in exports from a year ago. Sterling started to find some support despite its own trade report showing similar weakness as the deficit unexpectedly widened to -7.745 billion from -7.500 billion .

Talking Points
•    Japanese Yen: Finds Support at 98.50
•    Pound: Trade Deficit Unexpectedly Widens
•    Euro: German Exports Decline
•    US Dollar: MBA Mortgage Applications On Tap

Pound Finds Support Despite Drop In Exports, Are More Losses Ahead?

The Pound remained under pressure through overnight trading as it fell to as low as 1.3655 after the Chinese trade report showed a 25.7% drop in exports from a year ago. Sterling started to find some support despite its own trade report showing similar weakness as the deficit unexpectedly widened to -7.745 billion from -7.500 billion . Manufacturing in the country continues to be hurt by the global recession which was evident by the 4% drop in January exports.  The drop in demand for British goods combined with the sharp fall in domestic demand as consumer continue to retrench shows that the country’s recession may continue to deepen.

Indeed, the prospects for the U.K. economy continue to decline which has kept the pound depressed. Yesterday’s sharp equity rally saw the dollar lose ground against most currencies except the pound, which set a lower daily low for a fourth straight day. The BoE will launch its Gilt buying program today in an effort to lower LIBOR rates. The central bank is hoping that the lower rates will help spur lending and growth in the economy.  We could see sterling look to test the January 23rd low of 1.3503 given current momentum. However, there remains considerable upside risk for the pair as the next significant resistance level is the 20-Day SMA at 1.4184.

The Euro started to regain some of its footing after it weakened on the dour Chinese report which sent it to a low of 1.2616. The single currency also saw some pressure form German producer prices falling 1.2% in January which was the fourth straight monthly decline. Deflationary concerns would be the catalyst for the ECB to consider further easing and if price continue to fall it could lead to Euro weakness as interest rate expectations would decline.  However, MPC member Mersch was on the wires today warning that lower rates may not be a positive, as it might not encourage banks to clean up their balance sheets. The 20-Day SMA at 1.2690 could again capped upside potential, but if we see a clean break above then a test of 1.300 is likely.

The dollar may continue to find support as the dour Chinese trade data has reignited global recession fears and reversed risk sentiment. Asian trading had started on a strong note after the biggest rally in over three months on Wall St, before the decline in optimism. The greenback has started to give back some of its gains and if U.S. traders chose to ignore the global growth concerns and focus on the positive bank news from yesterday then we could see more losses ahead. Another month of declining mortgage applications could temper optimism as it would remind markets that the U.S. housing market has yet to hit a bottom and remains a drag on the economy. If equity markets give back yesterday’s gains it could discourage bulls and lead to more losses for equity markets which would add support for the dollar.

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