The pound has fallen below 1.4000 as U.K. bank names continue to take a hit on the back of the government increasing its stake in Lloyds Banking Group. The UK Treasury intends to increase its share of LBG from 43% to 65%, in return for insuring toxic loans worth GBP 260bn via the Asset Protection Scheme.
Talking Points
• Japanese Yen: Above 98.50
• Pound: Government Increases Stake In Lloyds
• Euro: Finds Support Despite Dovish ECB
• US Dollar: U.S. Automakers In Focus
Pound Heavy As Government Takes Major Stake in Lloyds, Are U.S. Automakers Next To Fall?
The pound has fallen below 1.4000 as U.K. bank names continue to take a hit on the back of the government increasing its stake in Lloyds Banking Group. The UK Treasury intends to increase its share of LBG from 43% to 65%, in return for insuring toxic loans worth GBP 260bn via the Asset Protection Scheme. The banking sector was down 9% in early trading which has been a weighing factor for the pound sending it to test 1.3950.
The BoE has been given the authority to start quantitative easing and is expected to print £150 billion to buy assets in attempt to revive the lending and the economy. Deputy Governor Charles Bean said today that the central bank has the scope to pump more money into the system if the initial efforts fail to generate the intended effects. However, he would warn that if inflation picked up as a result, then the efforts may need to be reversed. Sterling may remain under pressure until we start to see prices increase or signs that the government’s efforts are positively impacting the economy. 1.400 has remained as support and unless we get a clear break below this price level we may see the pound continue to remain range bound. The 20-Day SMA at 1.4266 continues to provide resistance and another failed test of the technical level could lead to more losses for the Pound.
The Euro traded heavy throughout the overnight session as equity markets were negatively impacted by the U.K. banking troubles and the IMF’s forecast of a global recession. Troubles in Eastern Europe also remain a weighing factor for the Euro as the World Bank report highlighted the troubles in emerging markets. Meanwhile, the Euro-Zone Sentix investor confidence indicator fell to its lowest level since recordkeeping began in 2003. The gauge fell to -42.7 from -36 as the current conditions component dropped to -59.75. The outlook has also dimmed with expectations falling to -23.5 from -18.25, its first decline in four months. The deepening recession and the prevailing banking global banking troubles have offset another rate cut be the ECB.
An empty economic docket will leave dollar price action in the hands of broader economic trends. Global equity markets remain suppressed and the prevailing risk aversion will remain supportive for the dollar. Indeed, the IMF predicted that the global economy will sink into its first recession since WWII. The World Bank also warned that the crisis could push 46 million people into poverty as 94 out of 116 developing countries have been hit by the downturn. The deteriorating conditions in emerging markets will most likely lead to political unrest which could lead to more safe-havens flows into the dollar which could remain a supportive factor over the medium term. U.S. equity markets are near critical support levels which could lead to a rebound. An increase in risk appetite would put the dollar at risk for a retracement during the week. However, Republican lawmakers calling for the government to let GM fall into bankruptcy will keep investors cautious until the U.S. auto industry troubles come to a conclusion. Risk sentiment should continue to dictate dollar sentiment as the only significant fundamental event risk on the week is February retail sales on Thursday.
Will The EUR/USD Break 1.2500? Join us in EURUSD Forum
Related Articles:
Forex Trading Weekly Forecast - 03.09.09
Mounting Strains In Global Financial Markets Threaten To Topple Government's Efforts To Revive Sentiment
To discuss this report contact John Rivera Currency Analyst: jrivera@fxcm.com
