The Euro fell below 1.25 to the US Dollar in overnight trading after Australia’s economy performed worse than economists expected in the fourth quarter, boosting fears of global recession and weighing on risky assets. UK service-sector PMI tops the economic calendar in European hours.
Key Overnight Developments
• Australian GDP Disappoints, Shrinks in -0.5% in Q4
• UK Consumer Confidence Rebounded in February, Says Nationwide
• NZ Commodity Export Prices Fall for Seventh Consecutive Month
Critical Levels
The Euro lost as much as -0.9% to the US Dollar in overnight trading, breaking below the psychologically significant 1.25 level. The British Pound also felt selling pressure but downside as more contained, with prices testing below 1.40 but managing to claw its way back above the key threshold ahead of the opening bell in London. For complete analysis of all the major currency pairs, please see the latest weekly technical outlook report.
Asia Session Highlights
UK Consumer Confidence unexpectedly improved in February according to Nationwide, a retail financial services firm. The metric rebounded from a record low in the previous month register at 43, beating economists’ expectations of a print at 38. The improvement came courtesy of an uptick in the future expectations portion of the survey: 77% of the people polled in February said they expect conditions to be the same or worse in the future versus 82% in January. It remains to be seen if the optimism can be sustained considering 40% of British mortgage holders are expected to be in negative equity by 2010, creating a negative wealth effect that would be disastrous for spending. The outlook is made all the more grim by forecasts calling for the unemployment rate to surpass 8% for the first time since 1996 by the fourth quarter of this year.
Australia’s economy performed worse than economists expected in the fourth quarter as Gross Domestic Product shrank -0.5% versus forecasts of a 0.2% result, the first negative print in 8 years. The Australian Dollar dropped 47 pips to 0.6329 against its US counterpart immediately after the announcement. Australia is now just three months shy of confirming the first official recession (defined as two consecutive quarters of negative growth) since 1991. Still, the Reserve Bank of Australia kept interest rates unchanged yesterday on expectations that the cumulative effects of monetary and fiscal measures already in place will “provide significant support to domestic demand over the period ahead”. Regardless, overnight index swaps show traders pricing in 75-100 basis points in additional easing over the next 12 months. An index of leading indicators compiled by the Westpac Banking Corp suggested the Australian economy will shrink at an annual pace of -1.2% in the first half of 2009.
In New Zealand, the ANZ Commodity Price reading fell -4.6% in February, the seventh consecutive month in negative territory. Aluminum prices led declines, falling -6.0%; dairy, New Zealand’s top export commodity, dropped -5.6%. Although falling prices and sluggish global demand have weighed on exports, the latest data saw the trade deficit unexpectedly narrow as deepening recession weighed on domestic spending and eroded imports more so than overseas sales.
Euro Session: What to Expect
The economic calendar looks tame in European hours with the UK Purchasing Manager Index for the services sector set to drop to 41.9 in February, down form 42.5 in the previous month. Analogous readings for the manufacturing and construction industries printed lower than expected earlier this week, suggesting overall business sentiment is pointing to more job cuts, weaker spending, and a deeper slump in economic growth. GDP fell -1.9% in the fourth quarter, the largest drop in over 17 years, while the International Monetary Fund has said that the UK faces the worst recession among the G7 nations. The Bank of England is set to announce monetary policy later this week, with mixed expectations likely to create substantial volatility for the British Pound.
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