The Pound found support after it fell below 1.7200 for the first time in three years. After dropping over 500 bps on the week, the Sterling is starting to demonstrate the first signs of support despite the trade balance report showing that exports are continuing to decline.
Talking Points • Japanese Yen: USDJPY Back Above 100.00 On Risk Appetite • Pound: UK Trade Deficit • Euro: Firms On Hawkish ECB Rhetoric • US Dollar: Wholesale Inventories and Jobless Claims On Tap British Pound Firms Despite Declining Exports, Euro Gains On Interest Rate Outlook. The Pound found support after it fell below 1.7200 for the first time in three years. After dropping over 500 bps on the week, the Sterling is starting to demonstrate the first signs of support despite the trade balance report showing that exports are continuing to decline. The trade balance deficit narrowed from a revised -£8238 to £8198 in August. However, the July figure was significantly revised lower from the initial reading of £7667. Meanwhile the housing markets showed further signs of weakening as home prices fell another 1.3% in September according to HBOS, the country’s largest mortgage lender. Declining exports will leave the U.K. economy dependent on domestic growth, which has been non-existent as Britons continue to battle the worst housing slump since possible the Great Depression. Growth in the 2Q stagnated and has increased expectations that further easing from the BoE will be needed. Despite the 50 bops cut yesterday as part of the coordinated effort, Credit Suisse Overnight Index Swaps are still pricing in another 146 bps worth of rate cuts over the next twelve months which could continue to weigh on the pound. The Euro bounced from support at 1.3600 rallying nearly 200 bps before finding resistance. The EURUS would reach as high as 1.3786 on the back of hawkish rhetoric from the ECB following the coordinated rate cut, demonstrating that the central bank is remaining stubborn regarding their price stability mandate. The statement from President Trichet following the 50 bps reduction showed that the central bank remains concerned with second round effects of inflation. The hawkish tone was reinforced by comments from ECB council member Likanen, following the MPC’s monthly report. Therefore, we may see further firming as the interest differential between the Euro-zone and the U.S. is expected to widen, before we see further weakness as the outlook for the economy dims as their policy responses are slow to come. Despite the comments Credit Suisse Overnight index swaps are still pricing in another 126 bps worth of rate cuts as markets believe that the region is entering a recession, which will ultimately force the central bank to ease further. The lack of a historic announcement today could see a continuation of the dollar’s pullback as the economic calendar will show another week of jobless claims above 400,000. Despite all the efforts by the Fed and U.S. government, the labor market continues to weaken and with the consolidation in the financial sector and the tight credit markets making it difficult for companies to generate the necessary cash flow to fund their operations, we may see further weakness. The outlook for domestic growth continues to decline and that will increase fears that a recession is unavoidable. Wholesale inventories declining will also show that optimism is fading from retailers as they continue to reduce stock in anticipation of a weak holiday shopping season. The dollar could receive a boost from the speculation that the U.S. government is considering taking ownership in U.S. banks as part of the $700 billion plan, which would be similar to the actions taken in the U.K . The investment could help restore confidence in the banking system, which could stop Americans from pulling their deposits and give banks confidence to start lending again. Will The EUR/USD Fall to 1.4000? Join us in EURUSD Forum Related Articles: Fed Expected To Ease Further Despite Global Rate Cut.