The pound started to take back some its losses from yesterday until in ran into resistance at former support at 1.4150 falling back below 1.4050. U.K. construction PMI falling to a record low of 27.8 from 34.5 in January led to the reverse in sentiment as it shows that the U.K. recession continues to deepen.
Talking Points
• Australian Dollar: RBA Leaves Rate Unchanged
• Pound: Construction Falls To Record Low
• Euro: ECB Rate Decision Coming Into Focus
• US Dollar: Bernanke and Geithner To Testify
Pound Finds Resistance After Construction Falls To Record Low, Will Bernanke, Geithner Impact Dollar Sentiment?
The pound started to take back some its losses from yesterday until in ran into resistance at former support at 1.4150 falling back below 1.4050. U.K. construction PMI falling to a record low of 27.8 from 34.5 in January led to the reverse in sentiment as it shows that the U.K. recession continues to deepen. Sterling has been on the run since the BoE hinted at further rate cuts and quantitative easing. The central bank is forecasted to cut rates by 50 bps on Thursday which may continue to be a weighing factor for the GBP/USD. However, Credit Suisse overnight index swaps are only pricing another 17 bps worth of rate cuts which may signal that a shallower than expected cut could be in store.
The Euro’s rally during Asian trading has run out of steam as it encountered resistance at 1.2680. The German wholesale price index fell 0.4% in January which was less than the 2.0% that was forecasted. Inflation has started to stabilize as we have seen prices globally consistently higher than expected. Despite CPI remaining well below the ECB’s target of 2.0% at 1.2%, the central bank may return their focus to price stability which could lead to a 25 bps rate cut versus the 50bps that is expected at Thursday’s policy meeting. The Euro continues to find support at 1.2500 unlike the Pound which broke from its recent trading range. Therefore, a move below that price level leaves the pair susceptible to sharp decline. Meanwhile, Swiss GDP contracted by 0.3% the most since 2004 on declining exports, but was less than forecasts of a decline of 0.8%. The better than expected growth numbers could be a sign that things aren’t deteriorating as fast as expected which could lead to a quicker rebound.
The first central bank to show restraint and miss markets expectations was the RBA which left its benchmark rate unchanged at 3.25%. RBA Governor Glenn Stevens said that the Australian economy has not contracted “as much as in other countries.” The Australian dollar rallied over 200 pips on the news to a high of 0.6459 before finding resistance. The Bank of Canada is scheduled to announce their interest rate decision this morning at 14:00 GMT and is forecasted to cut rates by 0.25% to an all-time low of 0.75%. Although Canada is a commodity driven economy similar to Australia, its economy has been dragged lower by a sharp decline in demand from the U.S.-its main trading partner. Therefore, a similar surprise is less likely and could lead to further Canadian dollar weakness. The USD/CAD appears to have broken fro its triangle pattern which could signal a break out to the upside.
After a massive sell off in global equity markets, we are starting to see risk appetite creep back in which has lead to some dollar weakness. U.S. equity futures are pointing toward a higher open but expect traders to remain cautious as banking concerns and expectations of a dour NFP report to ends the weak prevail. The U.S. pending home sales report is expected to continue the disappointment from the sector as forecasts are for a 3.0% decline. The most market moving event could be Fed Chairman Ben Bernanke’s testimony to the House budget committee. If the central bank leader recommits to his stance against nationalization of troubled banks and forecast a return to growth by 2010, then we could see a bounce in equity markets and dollar weakness. Additionally, Tim Geithner will speak before the Ways and Means committee today, where he could give more details on the bank rescue plan which could ease markets fears.
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To discuss this report contact John Rivera Currency Analyst: jrivera@fxcm.com
