The Pound fell to 1.3997 on a weaker than expected Australian GDP release which reignited concerns over global growth. However, positive equity markets, an improvement in consumer confidence and a better than expected PMI service print has helped Sterling reverse earlier loss and looking to test 1.4100.
[B][U]Talking Points[/U]
• Japanese Yen: Finds Resistance At 99.50
• Pound: Consumer Confidence, Service Sector Improve
• Euro: PMI Services Improves
• US Dollar: ADP an ISM No-Manufacturing On Tap
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Pound Pares Earlier Losses As Services Sector and Consumer Confidence Improves, Will BoE Cut Rates?[/U]
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The Pound fell to 1.3997 on a weaker than expected Australian GDP release which reignited concerns over global growth. However, positive equity markets, an improvement in consumer confidence and a better than expected PMI service print has helped Sterling reverse earlier loss and looking to test 1.4100. As we wrote yesterday the former support level is now providing resistance for the GBP/USD and a break above that level could lead to more pound gains. The February Nationwide consumer confidence report improved for the first time in five months to 43 from 38. Meanwhile, the U.K. service sector improved for a third straight month to 43.2 from 42.5, but remains well below the boom/bust level of 50.
Despite the signs that the U.K. economy may be stabilizing the BoE is expected to cut its benchmark rate tomorrow by 50 bps to 0.50%. The central bank is also expected to receive permission from Chancellor of the Exchequer Alistair Darling to begin quantitative easing. The sum of the actions could lead to Sterling weakness and another test of support at 1.4000. However, if the MPC signal that this is the end of the current easing policy then the possibility exists that the Pound could trade higher on the news.
The Euro broke below 1.2500 for the first time since November 21st, 2008 during Asian trading but immediately bounced back above the support level. A better than expected final PMI services reading has lent support for the EUR/USD as it was revised higher to 39.2 from 38.9. However, the breach of such significant support could signal more losses for the single currency, especially with the ECB expected to cut rate tomorrow. Economists are calling for a 50 bps cut but given the central bank’s mandate for price stability, recent stabilization of prices could lead to a shallower reduction. President Trichet has been leery of lowering rates close to zero for fear that it would trap the MPC and leave it without further recourse. Yet, some are speculating that the impact of the sharp decline in Eastern Europe will weigh on their western counterparts and the MPC will have no choice but to aggressively cut rates and consider quantitative easing. Unfortunately off balance sheet measures may prove more difficult for the ECB as it would have to decide amongst assets from several different countries.
After the dollar benefited from a flight to safety following the Australian GDP figures, it has begun to give back some of its gains. European equity markets are higher on the day and U.S. futures are pointing toward a strong open. Therefore, we may see risk appetite pick up, which could lead the dollar to erase earlier gains. However, the economic calendar could reverse trader sentiment as the upcoming ADP and ISM Non-manufacturing reports are expected to show the U.S. economic recession is deepening. The private employment report is forecasted to print a job loss of 630,000 in February. This will lower expectations for Friday’s Non-Farm payroll release which could continue to fuel risk aversion and bullish dollar sentiment. Meanwhile, the service sector is expected to have contracted for a fourth straight month in February with a print of 41.0 after 42.9 the month prior. Further deterioration in a sector which accounts for more than 70% of U.S. GDP may also weigh on the growth outlook for the economy. U.S. Secretary Treasury Tim Geithner’s resuming his testimony today and the Fed Beige book report also present event risk for the dollar.
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To discuss this report contact John Rivera Currency Analyst: [/I][[email protected]](301 Moved Permanently to: [email protected])
