Pound Rises after Testing Support After U.K. Home Prices Dropped To A Record Low

Talking Points
• Japanese Yen: Fails At 92.50
• Pound: Home Price Fall To Record Low
• Euro: Finding Support At 1.2700
• US Dollar: Markets Closed For President’s Day

Pound Rises after Testing Support After U.K. Home Prices Dropped To A Record Low

The pound would fall to support at 1.4150 after the Rightmove House price index fell to a new annualized record low of -9.1%. Sterling would bounce from the price level rising over 100 bps to over 1.4260. Sterling start the day’s trading with a 100 pip decline after the markets priced in the uneventful G-7 summit. The finance ministers and central bankers from the developed nations agreed that the global economy was in a “severe” downturn and they vowed to do everything they could to stop the problem. However, the lack of a course on how to deal with the problem added to concerns and sparked risk aversion flows.

The Confederation of British Industry has lowered its growth forecast for 2009 to -3.3% which would be the biggest contraction in almost 30 years. The inability of the BoE and other central banks to revive the credit markets has accelerated the downturn and prevented the housing market to stabilize which was the root of the problem. The central bank has forecasted more rate cuts and the possibility of quantitative easing. However, most of this may already be prices into the pound which has found solid support at 1.4150. Although, we may see another test of this level as we get closer to the next rate decision, the upside risks may be greater for sterling.

The post G-7 fallout would sink the euro to a low of 1.2731 before finding support, but the single currency would only reach as high as 1.2791 before giving back its gains. 1.2700 will be a key level to watch as it has held as support since December 5th,2008, break below could lead to a sharp move lower with a test of 1.2500 likely. Additionally, the 20-Day SMA has remained as staunch resistance and the technical level is on a downward trajectory as it has fallen below 1.300 for the first time since mid December at 1.2948. Now that the ECB has al but assured another rate cut at their March meeting we may see the euro continue to trade heavy.

The Yen price action during the overnight session demonstrates the lack of uncertainty in the markets. After a sharp fall to 91.32 the USD/JPY would shoot higher to 92.05. Japan’s economy contracted the most since 1974 which added to the dour post G-7 sentiment. However, the pair’s rise to 92.05 shows that markets are refraining from becoming too pessimistic with several stimulus packages from all the developed nations about to be unleashed.

The President’s day holiday should lead to a low volume day of trading as U.S. equity markets will be closed. However, be conscious that on such a day price action is susceptible to volatility as a few large buyers could impact price action. The dollar may continue to be supported by safe haven flows, following the dismal outlook by the G-7 for the global economy. The economic calendar isn’t expected to provide any major event risk until Friday’s CPI figures which may lead sentiment at the mercy of the broader themes. We could see equity markets rise now that fiscal stimulus plan has passed and trader snake their bets on the potential winners. The spike in risk appetite could weigh on the dollar.

Will The EUR/USD Break 1.2700? Join us in EURUSD Forum

Related Articles:
Forex Trading Weekly Forecast - 02.16.09
US Dollar, Japanese Yen Gain as G7 Predicts 'Severe' Global Recession

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