British Pound Under Pressure Amid IMF Debt Concerns, Weak Housing Data

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Fundamental Headlines

• SEC Investigates Canceled Trades – Wall Street Journal

• European Markets Fall Ahead of ECB – Wall Street Journal

• Rally Pauses as Traders Revisit Mixed Data - Financial Times

• Economy Seen Avoiding Recession Relapse as U.S. Data Can’t Get Much Worse- Bloomberg

• Trichet May Say ECB to Keep Emergency Lending Measures in Place Into 2011 – Bloomberg

EUR/USD: During the overnight trade, the IMF warned that Portugal, Italy, and Greece are amongst the countries with the highest risk of unsustainable debt. This will surely add weight onto the euro in the coming weeks and months as governments implement austerity measures to battle their budget deficits, which will in turn put downward pressure on growth. Despite the warning from the IMF, the euro pushed higher overnight as Economic activity in the 16 member euro area during the second quarter advanced 1.0 percent after climbing 0.3 percent in the three months through March. Indeed, growth in the Euro-zone is attributed to the massive jump in exports and investment; however, this pace of growth is unlikely to maintain its momentum in the medium term. Taking a closer look at the breakdown of the report, imports slid 1.6 percent for the quarter, while exports soared 1.7 percent in the same period. Looking ahead, EUR traders will shift their focus to the ECB rate decision which is expected to be released later on today.

GBP/USD: Nationwide house prices in the U.K. dropped 0.9 percent in August, which was much more than economists’ expectations of -0.3%. At the same time, the annualized rate rose a mere 3.9 percent after climbing 6.6 percent the month prior. The housing market in Great Britain is expected to come under increased pressure going into 2011 as households face uncertainty in the labor market, tight credit conditions, and the looming fiscal squeeze. Also weighing on the pound was a warning by the IMF that U.K.’s debt to GDP could rise to 90.6 percent in 2015. In turn, the British pound reversed course from the upper bounds of the descending channel to break back below the 200-day moving average. GBPUSD will now focus on the highly anticipated non-farm payrolls report, which is expected to be released tomorrow at 12:30 GMT. As of late, economists are anticipating that the unemployment rate in the world’s largest economy will rise to 9.6 percent for the month of August from 9.5 percent the previous month.

Written by Michael Wright, Currency Analyst

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Michael Wright is the author of FX Headlines, Fundamentals vs. Technical’s, Weekly Spotlight, and Forex Trading Weekly Forecast