The pound rose to as high as 1.5067 on the back of the results of the U.S. bank stress tests which helped erase some of the losses from yesterday, However, price action has been choppy through European trading despite factory gate prices in April rising by 0.6% which was the most in six months.
[U][B]Talking Points[/B][/U][B]
• Japanese Yen: Found Resistance at 99.50
• Pound: Factory Gate Prices Rise Most in 10 Months
• Euro: ECB Rate Decision Offers Many Possibilities
• US Dollar: Non-farm Payrolls on Tap[/B]
[U]Pound Remains Choppy Following Rise in Factory Gate Prices, U.S. Non-Farm Payrolls in Focus[/U]
The pound rose to as high as 1.5067 on the back of the results of the U.S. bank stress tests which helped erase some of the losses from yesterday, However, price action has been choppy through European trading despite factory gate prices in April rising by 0.6% which was the most in six months. The increase in outgoing producer prices was led by a 4.3% in petroleum products and a rise in government taxes. Yet, the annualized rate fell to 1.2% which was the lowest in five years and reaffirms the BoE’s prediction that inflation will undershoot their 2% target.
Consumer prices already stand at 2.9% and we saw the central bank’s concerns over deflation are increasing as they added another £50 billion to their quantitative easing efforts. Traders were expecting the central bank to wait before further action especially with their quarterly inflation report coming out next week. The aggressive move by the MPC raised concerns that policy makers were spooked by a piece of data that may have signaled that downside risks were growing. Nevertheless, the additional liquidity into the system should loosen credit markets and help promote growth which will continue to generate sterling support. Today’s price action will be driven by the U.S. labor report but the medium term trend remains higher with the 1/8 high of 1.5373 as the next resistance level.
The Euro has started to consolidate after regaining its footing during Asian trading after yesterday’s volatile price action following the ECB’s rate decision and subsequent announcement that they would initiate quantitative easing efforts. The central banks actions raised hopes that a prolonged recession for the region could be avoided as they caught up with the Fed and BoE whose liquidity providing measures have started to produce results. The single currency shot higher on the announcement reaching as high as 1.3454 against the dollar but fell to 1.3341as the pair sold off following the spike. Meanwhile, the German trade report showed that exports unexpectedly rose by 0.7% against expectations of a 1.3% decline. Increasing optimism has added support for the pair sending it back above 1.3400. The 200-Day SMA at 1.3475 looms as resistance, but a break above there leaves the possibility of a move to 1.4000.
The dollar lost ground overnight as the bank stress test results helped fuel increasing risk appetite. The government revealed that several of the banks would need to raise additional capital through issuing common shares, but the amounts were less than estimated for names like Citibank and Wells Fargo. Meanwhile, several financial institutions including Goldman Sachs were found adequately capitalized and subsequently broadcasted their intentions of repaying borrowed TARP funds. However, one of the parameters for the worst case scenario that the results were based on was unemployment at 8.9% in 2009, which is exactly the rate that is forecasted for today’s labor report. Therefore, if wee see the percentage of unemployed rise above that level today; it could bring into question the validity of the findings. Yet, if we see job losses in April below the 600,000 that is forecasted, then we could see optimism soar and the dollar weaken as traders forgo the safety of U.S. Treasuries for riskier assets. This could be the case with initial jobless claims falling and the ADP report showing private job losses slowing.
[B]Will The EUR/USD Break 1.4000? Join us in Forum[/B]
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[I]To discuss this report contact John Rivera Currency Analyst:[/I] [email protected]