[B]Talking Points
• Japanese Yen: Above 107.00 as Nikkei see string recovery
• Euro: Weakens persists as Mersch comments weigh
• British Pound: Rallies into 1.9700 on cross buying
• US Dollar: Bernanke and Building permits on tap[/B]
Euro continued to reel from yesterday’s comments by ECB Board member Yves Mersch which suggested that worries about price pressures in the Euro-zone may have been overblown. In sharp contrast to ECB chief Jean Claude Trichet Mr. Mersch stated that “We have certainly downside risks to economic activity and are not unaware of mitigation to price developments.”
We’ve long argued that ECB’s bark was far louder than its bite and given clear evidence of slowdown in economic activity the European monetary authorities would not raise rates in Q1 of 2008 irrespective of their hawkish rhetoric. Yesterday’s statement by Mr. Mersch was an implicit acknowledgement of that fact. The news sent EURUSD tumbling more than 200 points and the weakness persisted today especially on the crosses. EURGBP collapsed for more than 150 points – a massive drop for a pair that typically trades in a 30-40 point range – with dealers reporting that volatilities on options have exploded to a 76 month high.
Having risen so far so quickly it is not a surprise that the cross has corrected so much, especially given the fact that UK data has been relatively healthy putting the notion of a February rate cut from the BoE into doubt. Nevertheless the true picture regarding UK monetary policy may emerge this Friday when the Retail Sales report is due. If the UK consumer spending misses to the downside, expect the slide in cable to resume, but if the data remains steady, pound may make another run at the 2.0000 figure as short covering kicks in. For now the unit appears to have found sound support at the 1.9500 level and looks ready to climb higher.
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The day ahead, shows little of interest on the economic docket with only jobless claims and building permits on the calendar. We do however, have Chairman’s Bernanke testimony at 15:00 GMT and just like with Mr. Mersch’s comments, Mr. Bernanke’s statement could rile the markets. With little clarity on the economic front as traders wait to see if the predictions of US recession come true, the currency markets have become particularly volatile turning on a single word from monetary officials. If Chairman Bernanke continues to suggest a dovish course, the EURUSD could see a bounce as attention will turn to the US monetary policy.
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[B]To discuss this article please contact Boris Schlossberg, Senior Curency Strategist: [/B][email protected]