Euro liquidation continued at the start of the week as traders pared back their expectations of further rate hikes from ECB
[B]Talking Points
• Japanese Yen: Up 100 on better Nikkei and dollar strength
• Euro: Liquidation continues as yield expectations are pared back
• British Pound: Selling intensifies as evidence of recession grows
• US Dollar: No Data today[/B]
Euro Selling Persists, Pound Clobbered – Is UK Headed For A Recession?
Euro liquidation continued at the start of the week as traders pared back their expectations of further rate hikes from ECB in light of growing evidence that growth in the region was beginning to slow down materially. The large decline in German Factory orders on Friday weighed on the unit as the double whammy of high exchange rates and higher interest rates appears to be taking its toll on the critical export sector.
The EURUSD is clearly in a funk. We stated in our weekly Dollar: Is The Turn For Real? “So is this turn in the dollar for real? In the short term we think the answer is yes. Now that further rate hikes from the ECB appear to be very much in doubt, the greenback’s strength is likely to come not so much from any shockingly positive US economic news, but rather from further speculative unwinding of euro long positions.” That unwinding may continue this week possibly testing the 1.5500 level.
Although the EURUSD was down tonight, the real weakness was in the pound where Industrial Production results showed a collapse in demand. Not only was the data much worse than forecast dropping –0.8% versus –0.1% expected, but the readings from the month’s prior were revised downward. Given the massive increases in energy costs, the data suggests that the UK manufacturing sector is likely to see even more weakness in the months ahead as producers battle skyrocketing input costs and dampened demand.
The BoE which hosts its Monetary Policy meeting this Thursday, faces very unpleasant policy choices. UK monetary authorities continue to be concerned about the threat of inflation but may now have to respond to the very real possibility of a recession. Last week construction, manufacturing and service sectors all produced readings below the 50 boom/bust line indicating that a wide swath of UK economy is now contracting.
While almost on one expects the BoE to ease on Thursday, the idea that UK central bankers will keep rates steady for the rest of the year appears to be more and more suspect by the day. If UK labor markets begin to crater, the pressure on the BoE to ease will become immense. The pound therefore is likely to see more selling pressure in days ahead, especially on the crosses as markets begin to price in the possibility of rate cuts before year end as UK economy comes to standstill.
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