The Sterling Pound spent most of the overnight trading session consolidating near the 1.7550 price level before moving above 1.7600. U.K. industrial production contracting another 0.4% in July following a 0.1% drop the month prior failed to generate any significant price volatility.
Talking Points
· Japanese Yen: Tests Support at 107.50 On Renewed Risk Aversion
· Pound: Unchanged Despite Fall In Industrial Production
· Euro: Back Above 1.4150, Despite Decline In German Exports
· US Dollar: Pending Home Sales On Tap
Pound Finds Support Despite Declining Industrial Production, Has A Bottom Formed?
The Sterling Pound spent most of the overnight trading session consolidating near the 1.7550 price level before moving above 1.7600. U.K. industrial production contracting another 0.4% in July following a 0.1% drop the month prior failed to generate any significant price volatility. A 4.4% and 3.8% decline in Oil & Gas and mining activity respectively would lead to the third straight month of lower output. Meanwhile, house prices in Britain continued to fall as the RICS house balance printed at -81% as sales fell to a record low on tight lending standards.
The economic picture in the U.K. is continuing to get worse and with inflation pressures starting to ease the likely hood of a BoE rate cut increases. Indeed, Credit Suisse overnight index swaps are pricing in 88bps worth of rate reductions in the next 12 months. However, traders were pricing in 100 bops just yesterday which may signal that the takeover of Fannie Mae and Freddie Mac may have improved the outlook for the British housing market as it should increase liquidity. Indeed, A report from the London based times, citing unidentified government officials, states that Chancellor Dairling is preparing to take action to help cure the ills of the U.K. housing market pending a report from HBOS. The sterling’s appreciation following the dour manufacturing data may signal that a bottom has formed as was seen in the Dailyfx SSI (speculative sentiment indicator). The signal for the pound flipped to a bullish as the contrarian indicator showed 52% retail traders were short the GBPUSD. Further supporting the case is Jamie Saettele’s technical analysis which is calling for a larger correction if the pair pushes through 1.7974.
Similar to the sterling pound, the Euro may be looking to start a longer term reversal as it has steadily climbed from support at 1.4050 to above 1.4180 despite a dour German trade report. Europe’s largest economy saw its trade surplus shrink to 13.9 billion Euros from 17.5 billion as exports fell. Slowing global growth saw demand for German goods fall 1.7% which was greater than the 1.1% that was expected by economists. A move above 1.4200 could see the pair look to test the 1.4400 price level by the end of the day.
The impact from the GSE’s takeover is starting to fade as traders start to realize that the recovery process will still be a long despite the potential of increased liquidity and lower mortgage rates. Indeed, today’s pending home sales report will reinforce the point as purchases are expected to have fallen 1.5% in July which could weigh on the dollar today. The hosing market is plagued by increasing inventory and mounting foreclosures that will require time for lower lending rates to inspire enough buyers to take up the excess.
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