British Pound Extends Decline as 4Q GDP Disappoints, Euro Halts Two-Day Rally

Talking Points
•    Japanese Yen: Benefits From the Rise in Risk Aversion
•    Pound: U.K. Emerges From the Recession
•    Euro: German Business Confidence Hits 18-Month High
•    US Dollar: Consumer Confidence, Home Price Index on Tap

British Pound Extends Decline as 4Q GDP Disappoints, Euro Halts Two-Day Rally

The British Pound extended the overnight decline and slipped to a low of 1.6121 as the advanced 4Q GDP reading crossed the wires weaker-than-expected, and the currency may face increased selling pressures going into the U.S. trade as investors scale back their appetite for risk. Meanwhile, Bank of England Governor Mervyn King said regulators should “debate the long-run structure” of the financial industry and slowly create new rules in order “not to choke off the ability of the banking system to fund the real economy,” and went onto say that now is not the “momentum to raise capital requirements” while speaking in front of the Treasury Select Committee.

Nevertheless, economic activity in the U.K. expanded 0.1% in the fourth quarter amid projections for a 0.4% rise, while the annualized rate slipped 3.2% from the previous year versus forecasts for a 3.0% contraction, and the data reinforces fears for a protracted recovery as households continue to face fading demands for employment paired with tightening credit conditions. At the same time, the index of services increased 0.1% during the three-months through November, which fell short of expectations for a 0.4% rise, while the British Bankers’ Association gauge for mortgage lending increased to an annualized pace of 45.897K in December from a revised 44.965K to top forecasts for a rise to 45.750K. As policy makers pledge to encourage a sustainable recovery in the U.K., the BoE is widely anticipated to hold the benchmark interest rate at the record-low next month, but may look to conclude its emergency program as the central bank aims to normalize policy this year.

The Euro halted the two-day rally against the greenback and slipped to a low of 1.4071 following the rise in risk aversion, but the overnight decline may taper off going into the North American session as the daily RSI approaches oversold territory. Nevertheless, business confidence in Germany rose to an 18-month high in January, with the headline reading increasing to 95.8 from a revised 94.6 in the previous month, while the gauge for future expectations advanced to 100.6 from 98.9 in December to mark the highest reading since July 2007. Moreover, German import prices increased 0.5% in December amid expectations for a flat reading, driven by a 0.9% rise in the cost of basic goods, while the annualized rate slipped 1.0% from the previous year after contracting 5.0% in November. Meanwhile, European Central Bank board member Juergen Stark held a cautious tone and said that the economic outlook remains highly uncertain as policy makers anticipate to see a “bumpy recovery,” but went onto say that the central bank should normalize “as soon as the prevalent conditions allow it” during a speech in Frankfurt. At the same time, Mr. Stark said that the Governing Council remains “seriously concerned above the sharp rise forecast for public deficits and debt,” and argued policy makers cannot “exclude further ratings downgrades for these countries and negative reactions from financial markets.”

The greenback rallied against most of its currency counterparts as investors scale back their appetite for risk, while the USD/JPY slipped to a low of 89.37, and the reserve-currency may continue to appreciate going into the North American trade as equity futures foreshadow a lower open for the U.S. market. Meanwhile, consumer confidence in the world’s largest economy is expected to improve for the third consecutive month in January, with market participants forecasting the Conference Board’s index to rise to 53.5 from 52.9 in the previous month, while the home price index is anticipated to increase 0.2% in November after rising 0.6% in the previous month. At the same time, the Richmond Fed manufacturing index is expected to increased to 0 in January from -4 in the month prior, and conditions are likely to improve going forward as the expansion in monetary and fiscal policy continues to feed through the real economy. 

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To discuss this report contact David Song, Currency Analyst: dsong@fxcm.com