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British Pound Declines After BOE’s Sentence Sees Risk of ‘Double Dip Recession’

British Pound Declines After BOE’s Sentence Sees Risk of ‘Double Dip Recession’

2010-03-19 06:33:00
Ilya Spivak, Sr. Currency Strategist
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Key Overnight Developments

Canadian Dollar Broadly Lower Ahead of February Inflation Figures
Pound Declines After BOE’s Sentence Sees Risk of ‘Double Dip Recession’
• Japan’s All Activity Index Outperforms in January on Service Sector Sales


Critical Levels

03192010 1

The Euro inched higher against the US Dollar, adding 0.1 percent through overnight trade. The British Pound shed as much as 0.4 percent against the greenback following comments from the BOE’s Andrew Sentence in an interview with CNBC (see below). We remain short EURUSD at 1.4881 and GBPUSD at 1.5765.


Asia Session Highlights

03192010 2

Currency markets took an opportunity to consolidate in Asian trade, with most major pairs consolidating near familiar levels ahead of the opening bell in Europe. The British Pound and the Canadian Dollar were the only significant movers on the session, trading down 0.4 percent and 0.3 percent respectively against their US counterpart.

The Loonie slid ahead of the release of February’s Consumer Price Index figures amid expectations for the annual inflation rate to print lower at 1.4% from 1.9% in the previous month, marking the first decline in five months. Monetary policy expectations have been a major driver of the CAD strength seen in over weeks as a Credit Suisse gauge of the priced-in rate hike outlook over the next 12 months jumping to the highest level on record at 129bps. A lackluster CPI result hints that such lofty expectations may have been overstated, leaving the door open for a bit of profit-taking to weigh on the buoyant Canadian unit.

Meanwhile, the UK unit tracked lower after the Bank of England’s Andrew Sentence said in an interview with CNBC that there is “some risks of a double dip recession” and warned that although he is “relatively encouraged...[there] can be bumps along the road [and] shocks along the way.” Sentence also warned that it’s not the job of the central bank to fine-tune fiscal policy and called for “significant” budgetary tightening as economic recovery gains momentum.

Japan’s All Industry Activity Index jumped 3.8 percent in January, marking the largest monthly increase in nearly 17 years, with nearly a fifth of the increase owed to a strong rebound in service-sector activity. The report failed to excite the markets however considering its outcome was well priced into the exchange after the release of the Tertiary Industry Index two days ago. It remains to be seen whether demand is able to remain supported however after a survey of large manufacturers showed that firms plan to will continue to scale back labor forces through the third quarter, hinting that any significant rebound in wages and spending (including that on services) will be hard to come by.


Euro Session: What to Expect

03192010 3

The economic calendar is largely uneventful in European hours, with German Producer Prices being the only item of interest on the docket. Expectations call for the report to show that the annualized pace of wholesale deflation slowed to 2.8 percent in February, the slowest in ten months. The metric has tracked closely with the rebound in oil prices since mid-2009 and more of the same likely this time around. Inflation is hardly a central concern for traders at this point however with Euro Zone CPI tracking well below the European Central Bank’s 2% target level and signs of stalling growth in the latest GDP figures.

On balance, risk sentiment is likely to remain the key driver for currency markets. European equity index futures are trading about 0.5 percent higher on average ahead of the opening bell, hinting at a “risk on” session that is likely to see the safety-linked US Dollar pull back against most of its major counterparts into the close of the trading week.


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