Euro Breaks Below 1.3300 as 4Q GDP Falls More Than Expected, Pound Slips Below 1.4600

The Euro weakened against the U.S. dollar following the drop in risk appetite, and slipped below the 1.3300 level after the final GDP reading for the fourth quarter foreshadowed a deepening recession in the region. As a result, the single-currency slipped below the 20-Day SMA for the first time since 3/11 to reach an intraday low of 1.3263

[B][U]Talking Points[/U]
• Japanese Yen: BoJ Extend Collateral Accepted For Bank Loans
• Pound: Industrial Production Drops Another 1.0% in February
• Euro: GDP Contracts More Than Expected in Fourth Quarter
• US Dollar: Consumer Credit and ABC Consumer Confidence on Tap
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Euro Breaks Below 1.3300 as 4Q GDP Falls More Than Expected, Pound Slips Below 1.4600 as Industrial Outputs Falter[/U][/B]

The Euro weakened against the U.S. dollar following the drop in risk appetite, and slipped below the 1.3300 level after the final GDP reading for the fourth quarter foreshadowed a deepening recession in the region. As a result, the single-currency slipped below the 20-Day SMA for the first time since 3/11 to reach an intraday low of 1.3263, and the lack of momentum to sustain the rally from March should lead the pair lower over the week, and may fall towards 1.3163, the 100-Day SMA, as investors curb their appetite for high-yielding assets.

The growth rate in the Euro-Zone fell 1.6% from the third quarter, which was higher than the 1.5% contraction seen in the preliminary reading, while the annual rate of growth slipped 1.5% to mark its first full-year decline on record. The breakdown of the report showed that business spending plunged 4.0% in the three-months to December, which was followed by a 0.3% drop in household consumption, and the data continues to reinforce a weakening outlook for growth and inflation as the region faces its worst economic downturn in over half a century. As growth prospects deteriorate at a record pace, the European Central Bank is likely to lower borrowing costs by another 25bp in the month ahead however, as President Trichet remains reluctant to overshoot the interest rate, the board may adopt additional tools to stimulate the ailing economy as

The British pound dropped 150+ pips to slip below 1.4600, and may continue to face increased selling pressures over the week as the economic calendar is expected to reinforce a dour outlook for growth and inflation. As a result, Cable is likely to fall below the 100-Day SMA at 1.4561, and may work its way towards 1.4344, the 50-Day SMA, over the remainder of the week to test for short-term support. Meanwhile, a report by the Office for National Statistics showed that industrial outputs dropped another 1.0% in February after falling 2.7% in the previous month, while the annualized rate plunged 12.5% from the previous year. At the same time, manufacturing production slipped 0.9% during the same period, which was less than the 1.5% contraction anticipated by economists, while outputs plunged 13.8% from the previous year, and the data foreshadows a dour outlook for the labor market as firms continue to cut back on production and employment in an effort to reduce costs.

The lack of tier-one data could leave the U.S. dollar at the mercy of risk trends, and as the futures market projects a lower open for equities today, a drop in market sentiment should boost demands for the greenback as the reserve currency continues to benefit from safe-haven flows. Nevertheless, the Federal Reserve is expected to report a $3.0B drop in consumer credit, while the ABC consumer confidence index is expected to hold near the record-low in the week ending April 5, fears of a deepening recession may weigh on the exchange rate as the economic docket continues to reinforce a dour outlook for household spending.

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[I]To discuss this report contact David Song Currency Analyst: <[email protected]>[/I]