The pound reached as high as 1.4287 before finding resistance and finds itself consolidating above the 14.200 price level. Sterling has steadily climbed higher since hitting its weekly low of 1.3964 despite the BoE cutting rates by 50 bps yesterday. Traders chose to ignore factory gate prices falling from 3.5% to 3.1% -the lowest level since 2007.
Talking Points
• Japanese Yen: Test Support at 96.50
• Pound: Producer Price Fall To Lowest Since 2007
• Euro: Finds Support Despite Dovish ECB
• US Dollar: Non-Farm Payrolls on Tap
Pound, Euro Find Support Despite Rate Cuts, U.S. Non-Farm payrolls Ahead
The pound reached as high as 1.4287 before finding resistance and finds itself consolidating above the 14.200 price level. Sterling has steadily climbed higher since hitting its weekly low of 1.3964 despite the BoE cutting rates by 50 bps yesterday. Traders chose to ignore factory gate prices falling from 3.5% to 3.1% -the lowest level since 2007. Fuel prices falling by 4.5% led the decline but a 7.7% increase in crude oil costs could be a sign that prices may start to stabilize.
The inflation data was rendered insignificant by yesterday’s actions by the BoE. The central bank brought its benchmark rate to a record low of 0.50% and confirmed that it would begin quantitative easing. Governor Mervyn King announced that the central bank would start printing as much as £1150 billion to pump into the system. The MPC is betting that the will be able to jump start the economy and help liquidate credit markets. However, the risks are that they could reignite inflation risks and create an environment of stagflation. The GBOP/USD failure to cleanly break below 1.4000 could signal that the price level will serve as a bottom for the pair and the upside risk could be greater.
The Euro surprisingly rose to an intraday high of 1.2725 despite the ECB cutting rates by 50 bps and a 4% sell off in U.S. equity markets. The central bank brought its benchmark rate to 1.50% and signaled that more easing is a possibility. President Trichet stated that he could not rule out further easing after the rate decision. Those comments were reinforced today by ECB member Lorenzo Bini Smaghi, who said that the bank must be ready to react of deflation concerns rise but he also warned of overshooting with rate cuts which is more in line with the measured approach the MPVC has maintained. Traders may be relieved that that the central bank is becoming more aggressive which could limit the downturn for the Euro-zone economy which could provide short-term support for the Euro.
The dollar/yen fell nearly 200 bps overnight to 96.57 on broad based dollar weakness. We may also be seeing the Yen regain some of its safe-haven status as the U.S. economy continues to weaken. Rumors of a 1 million NFP print could be a possible source of dollar weakness and flows returning to the Yen.
The U.S. Non-farm payroll report will be the major event risk for the U.S. trading session, as it is expected to show the economy lost 640,000 jobs in February. Additionally, the unemployment rate is expected to have risen to 7.9% which is not a surprise as initial jobless claims have printed above 600,000 throughout the month. However, the dour data may not provoke the expected flight to safety as the results have been anticipated with the ADP private job report showing losses of 692,000. Indeed, U.S. equity markets may have already priced in the results during yesterday’s trading session which saw prices fall to the lowest levels in 12 years. Yet, we could see fundamentals start to drive price action again which could lead to the continuation of the dollar weakness that we have seen overnight.
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To discuss this report contact John Rivera Currency Analyst: jrivera@fxcm.com
