The Pound fell over 200 bps during the overnight trading sessions on declining interest rate expectations and a 16 year low in manufacturing activity. U.K. PMI fell to 34.4 from a revised 40.7 on new orders plunging to 29.7 from 37 as the global economy continues to slow.
Talking Points • Japanese Yen: Consolidating Above 95.20 • Pound: Home Found Support at 1.5360 • Euro: Weakens On Easing Inflation • US Dollar: Risk “Black Friday” May Impact Sentiment Pound Drops As Manufacturing Activity Falls To Lowest Level In 16 Years The Pound fell over 200 bps during the overnight trading sessions on declining interest rate expectations and a 16 year low in manufacturing activity. U.K. PMI fell to 34.4 from a revised 40.7 on new orders plunging to 29.7 from 37 as the global economy continues to slow. The breakdown also showed prices significantly falling with input costs dropping to 44.2 from 54.5 adding to deflation fears. The outlook for domestic growth also took a blow as the employment component showed a sharp decline to 35.7 from 40.2. The increasing expectations that the BoE will cut their benchmark rate by 100 bps at their December 4th policy meeting started the Pound’s weakness before the weaker manufacturing data accelerated its decline. Inflation is expected to fall below the Central Bank’s 2% target and mounting deflation concerns has fueled the MPC’s aggressive easing policy. Meanwhile, mortgage approvals fell to its lowest level on record at 32,000 as the housing market continues to weaken dragging the economy into a severe recession. Credit Suisse overnight index swaps are pricing in another 154 bps worth of cuts over the next twelve months which will continue to be a weighing factor in the Sterling. The Cable has broken below 1.5100 for the first time since November 25th and if psychological support doesn’t hold at 1.500 we could see it look to test the November 21st low of 1.4708. The Euro traded choppy despite an unexpected drop in German retail sales and a weaker than expected final PMI reading. The 1.6% decline in German consumption was far less than the 0.5% gain that economist were expecting and would sink the Euro nearly 75 pips. However, Euro bulls continued to defend the single currency which also withstood PMI falling to 35.6 from the flash estimate of 36.2.The ECB is also expected to cut rates at their December 4th policy meeting by 50 bps. However, markets are calling for mare aggressive easing as the regions economy sinks further into recession. The measured approach of the central bank has help to provide support for the Euro as the pace of its easing is trailing monetary authorities of other developed nations. The Yen crosses came under pressure as risk aversion led to the continuation of the carry trade unwinding. The USD/JPY was threatening the November 21st low of 93.63 with the possibility of a break below the 93.00 price level for the first time since October 28th a possibility. They Yen’s strength comes despite comments from BoJ Governor Shirakawa that the Japanese economy is deteriorating at an accelerated pace. The central bank leader has set an emergency meeting for December 2nd to discuss measures to boost flexibility in fund operations. The Dollar could continue to see support today from risk aversion flows as the outlook for the global economy continues to dim. Indeed, we have seen a significant slowdown from emerging markets China and Russia which were the main drivers of global growth. The Yuan weakened to its lowest level since 2005 as Chinese policy makers are expected to favor a weaker currency. This path of monetary policy may raise tensions between the Asian giant and the U.S. days ahead of Treasury Secretary Hank Paulson’s visit. The tension may fuel more safe-haven flows adding to bullish dollar sentiment. ISM manufacturing is due to cross the wires today and activity is expected to fall further into contraction. Economists are predicting the gauge will fall to 37.5 from 38.9, which would be the lowest level since 1982. The dour fundamental data may only heighten economic fears and increase risk aversion, adding to dollar strength. Will The EUR/USD Fall to 1.2000? Join us in EURUSD Forum Related Articles: Forex Trading Weekly Forecast - November 28, 2008 BoJ Governor Shirakawa Warns Economy Slowing Rapidly, Funding Risks Emerge To discuss this report contact John Rivera, Currency Analyst: jrivera@fxcm.com