daily brief

Pound Finds Support Despite Looming BoE Rate Cut

Wednesday, 31 December 2008 09:27:35 GMT  |  John Rivera, Currency Analyst

Talking Points
•    Japanese Yen: Finds Resistance at 20-Day SMA
•    Pound: Finds Support Ahead Of New Year
•    Euro: Trichet Leaves Markets Guessing
•    US Dollar: Initial Jobless Claims On Tap

Pound Finds Support Despite Looming BoE Rate Cut

The Pound found some support as the curtain is about to close on European markets for 2008 rising over 100 bps from its session low of 1.4420. Early price action was subdued as a half day for equity markets, the pending New Year and an empty economic calendar was a recipe for a quiet end to the year. However, the thin volume has left the cable susceptible to swings due to institutional buying. 

The New Year will start with a slew of event risk for the Pound with mortgage approvals on the first day of trading and a BoE rate decision the following week. The housing market is expected to continue to show weakness as new loans are expected to remain at a record low of 32,000. Also, the U.K. PMI manufacturing indicator is due out next week with expectations that tot will set a fresh record low of 33.6. The deepening recession for the country has increased expectations that the central bank will continue its aggressive easing policy with a 50-100 bps rate cut. Therefore, we may see the Sterling come under pressure as we near the policy decision.

After some initial volatility attributed to selling from a medium sized German house which sent it as low as 1.4050, Euro trading has quieted down ahead of the Holiday. Markets are still expecting more easing from the ECB at their January 15th meeting despite recent comments from ECB president Trichet. In an interview with the German financial daily Boersen Zeitung, saying: "We are concentrating at present on the impact of our previous decisions", the central bank leader tried to temper expectations for additional rate cuts. However,   with inflation falling at an accelerating rate the threat of deflation looms and further easing may be needed to maintain the MPC’s mandate of price stability.

U.S. initial jobless claims will provide the final piece of event risk of 2008. Forecasts are that they will remain above 500,000 for a seventh week. Although we are still far from the early eighties which saw claims above 600,000 for months at a time, it doesn’t bode well for next week’s NFP report which is forecasted to show job losses of 475,000 for December. Therefore, another week of increasing unemployment rolls could provide one last bout of volatility for the dollar. However,  with the New Year upon us, we will most likely see limited price action.

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Related Articles:

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

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