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British Pound Could Be Dragged Lower On Broader Risk Aversion

British Pound Could Be Dragged Lower On Broader Risk Aversion

2010-05-25 17:58:00
John Rivera, Currency Analyst


The GBP/USD has begun to erase earlier losses generated by a broad based flight to safety that was fueled by LIBOR rates reaching a ten month high. The higher costs for banks to borrow funds reminded traders of the credit crisis and was taken as a sign that conditions continue to deteriorate. The pair has since regained its footing following a rise in U.S. consumer confidence to the highest level since March, 2008 which eased concerns that Europe’s troubles could become a global phenomenon. Risk trends have begun to play a major part in determining sterling direction with the BoE expected to remain on hold for the foreseeable future. Indeed, the correlation between stocks and the pair has held at 51% over the past week strengthening from 31% a week ago. Unsurprisingly, the correlation between U.K. yield exactions and the pound/dollar has weakened to- 2% from 17% a week ago.


BoE Interest Rate Expectations

The U.K. sends 50% of its exports to the Euro-Zone and could be significantly impacted if the region falls into a period of stagnation on the back of reduced government spending. This has become a cause for concern for policy makers and has dimmed the already non-existent interest rate expectations for the U.K. Overnight index swaps are now pricing in 21 bps of rate hikes in the next year which is essentially one rate hike. The upcoming BBA home loan report could help raise the outlook for yields if it shows that banks have started to loosen lending standards. Easier credit and firm demand in the housing sector could help fuel domestic growth, making the country less reliant on demand from abroad. Discuss this and trading ideas join the GBP/USD forum.


FOMC Interest Rate Expectations

The outlook for U.S, interest rates have dimmed further as the troubles in Europe are expected to increase policy maker’s apprehension in raising rates too soon. Fed funds futures are only pricing in a 21.1% chance of a rate hike in November with very little chance of tightening beginning beforehand. The expected improvements in durable goods orders and the second reading of first quarter GDP could improve the prospect of a rate hike if the U.S. economy continues to show signs of being able to withstand a slowdown from across the pond. Demand for long lasting items is forecasted to have increases by 1.3% in April, a sign that Americans remain optimistic. Meanwhile, the second reading of growth is expected to be revised higher to 3.5% from 3.2% as consumer spending was stronger than initially anticipated.



Equity markets extended their decline as rising Libor rates raised a red flag for traders sending the Dow over 2% lower in early trading. The blue chip index has erased some of its losses following the improve U.S. consumer sentiment report but appears headed for a close below 10,000 for the first time since February 8th, opening the door for further losses. U.S. fundamental data is expected to continue showing improvement which could slow the pace of decline, but if concerns over global growth persist we could see a test of support at 9428-38.2% Fibo of 6469-11,258. Discuss this and other fundamental data in the Economics Forum.


To discuss this report or be added to the email list contact John Rivera, Currency Analyst: instructor@dailyfx.com

DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.


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