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Pound Pares Gains As Producer Prices Fall For Fourth Month

Monday, 08 December 2008 09:54:46 GMT  |  John Rivera, Currency Analyst

The Pound rallied over 300 bps during overnight trading before finding resistance at 1.5050. A producer price report that showed costs declined for a fourth month would weigh on the Sterling as the prospect of more BoE easing increased.

Talking Points
• Japanese Yen: Finds Resistance at 93.80
• Pound: Producer Prices Fall
• Euro: Investor Confidence At Record Low
• US Dollar: Risk Sentiment To Dictate Flows

Pound Pares Gains As Producer Prices Fall For Fourth Month

The Pound rallied over 300 bps during overnight trading before finding resistance at 1.5050. A producer price report that showed costs declined for a fourth month would weigh on the Sterling as the prospect of more BoE easing increased. Input costs fell 3.3% in November dragging the annualized rate down to 7.5% from 15.4%. Meanwhile prices at the factory gate slipped 0.7% in November and to 5.1% from a revised 6.7% year-over-year. However, core prices rose 0.2% against expectations of a 0.4% decline in November bringing annualized prices up to 5.1% from 5.0% signaling that lower oil prices aren’t filtering through to other parts of the economy as fast as expected.

The largest drop in energy costs in 20 years has been the source of easing price pressures and as they continue to fall we may see concerns over deflation increase. The BoE’s recent aggressive easing which saw them lower their benchmark 100 bps last week was driven by these concerns as they anticipate that inflation will fall below their 2% target in 2009. Therefore, more rate reductions are expected which could limit the upside potential of the Pound. The 20-Day SMA held as a staunch resistance level again today and forex trades will be watching this technical indicator as a clean break above could signal that an extended bullish rally is forthcoming.

The Euro gained over 150 bps on the back of increasing risk appetite reaching as high as 1.2915 before a dour investor sentiment report derailed its momentum. The Sentix investor confidence gauge fell to a record low of -42.3 from -36.4 in November as manufacturing activity has grinded to a halt and the economy appears headed for a prolonged recession. The ECB’s deeper then expected 75 bps cut last week may help boost optimism as the central bank has shown the willingness to abandon their price stability mandate and take actions to promote growth. Indeed, Executive Board member Jose Manuel Gonzalez-Paramo was quoted as saying "We don't rule out reducing the price of money again in the next few months." Yet, the prospect of more easing will most likely remain a weighing factor for the single currency which continues to trade in its current two month range of 1.2400 – 1.3000.

The surprising advance of U.S. equity markets following the announcement that the economy lost more than 500,000 jobs has spurred hope that a bottom may have formed. The anticipation that risk appetite will carry forward has weighed on the dollar as investors shed U.S. treasury’s for higher yielding assets. Investor confidence received another boost over the weekend when President elect Barack Obama pledged a large fiscal stimulus plan that will boast significant infrastructure spending and job creation. However, U.S. housing and consumer consumption data latter in the week could remind traders of the dire circumstances of the economy decreasing optimism and restoring dollar bullish sentiment. Indeed, the USD/JPY has started giving back earlier gains which may be a sign that risk appetite may not sustain throughout the U.S. session.

Will The EUR/USD Fall to 1.2000? Join us in EURUSD Forum

Related Articles:

Forex Trading Weekly Forecast - 12.08.08
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Dollar Rallies Despite The Biggest Drop In Non-Farm Payrolls (NFPs) In 34 Years

To discuss this report contact John Rivera, Currency Analyst: jrivera@fxcm.com

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