U.S. Dollar Extends Advance, British Pound Tumbles Lower as Public Finances Deteriorate

Talking Points
•    Japanese Yen: Rallies Across the Board
•    Pound: U.K. Posts First January Deficit on Record
•    Euro: Bundesbank Says Recovery Remains “Intact”
•    U.S. Dollar: Producer Prices, Philadelphia Fed on Tap

U.S. Dollar Extends Advance, British Pound Tumbles Lower as Public Finances Deteriorate

The British Pound tipped lower for the second day as the economic docket reinforced a weakened outlook for the economy, and we may see the exchange rate maintain the narrow range carried over from the previous week as the overnight decline appears to have stalled at a low of 1.5575. Meanwhile, Bank of England board member Kate Barker held a cautious outlook for the U.K. during an interview with the Belfast Newsletter as she expects the economic recovery to be “quite hesitant” this year, and saw a risk for “another quarter of negative production” as the private sector remains weak.

Meanwhile, a report by the BoE showed mortgage approvals by the major banks in the U.K. unexpectedly slipped to 49K in January from a revised 60K in the previous month, while the M4 money supply expanded 0.6% during the same period to top forecasts for a 0.5% rise. At the same time, public sector net borrowing increased GBP 4.3B during the first month of 2010 to mark the first budget deficit since comparable records began in 1993 and failed to meet expectations for a GBP 2.6B surplus, while public finances fell GBP 11.8B after rising a revised GBP 16.3B in December. The data certainly instills a dour outlook for the region as policy makers continue to see a risk for a protracted recovery, and as a result, we may see the central bank maintain a dovish stance going into the second-half of the year as Governor Mervyn King anticipates inflation to fall back to the 2% target over the coming months.

The Euro bounced back from the low (1.3539) during the overnight trade as investors increased their appetite for risk, and we may see the EUR/USD continue to trend sideways going into the U.S. session as the pair appears maintains the broad range from earlier this month. Meanwhile German Chancellor Angela Merkel held a stern tone during a speech in northern Germany and said that Greece has “falsified statistics for years,” and argued Goldman Sachs Group’s role in helping the ailing country to mask its obligations could turn out to be a “scandal.” The remarks certainly exemplifies Germany’s reluctant to bailout Greece on its own as the nation continues to face economic headwinds, and ongoing turmoil in the countries operating under the single-currency could lead the European Central Bank to maintain a dovish outlook for future policy as they aim to encourage a sustainable recovery. Nevertheless, the Bundesbank said the rebound in economic activity remains “intact” in its February bulletin, and expects price pressures to remain subdued as they see a “gradual” recovery in the world economy.

The greenback strengthened against most of its currency counterparts overnight as the Federal Reserve prepares to tighten policy over the coming months, and increased speculation for a rate hike later this year is likely to drive the dollar higher as it loses its appeal as a funding-currency. Meanwhile, producer prices are expected to rise 0.8% in January after advancing 0.2% in the previous month, while the annualize rate is anticipated to hold at 4.4%, which is the highest since October 2008. In addition, the Philadelphia Fed index is forecasted to rise to 17.0 from 15.2 in January, while initial and continuing jobless claims are projected to weaken further during the first two-weeks of February.


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