Pound Trades Heavy Despite Jump In Construction Activity, But Upside Potential Remain

DailyFx · June 2, 2009, 8:40am

The pound has remained heavy during overnight trading despite an improvement in lending and a jump in construction activity. Quiet equity markets have set the tone for forex price action as we have seen some profit taking after the recent rally, with the GBP/USD falling over 150 pips since reaching a high of 1.6500 yesterday.

[B]Talking Points
• Japanese Yen: Range Bounds As Risk Appetite Wanes
• Pound: Mortgage Approvals and Construction Activity Improve
• Euro: Unemployment Rises To Decade High
• US Dollar: Pending Home Sales On Tap

[/B][U][B]Pound Trades Heavy Despite Jump In Construction Activity, But Upside Potential Remains. [/B][/U]

The pound has remained heavy during overnight trading despite an improvement in lending and a jump in construction activity. Quiet equity markets have set the tone for forex price action as we have seen some profit taking after the recent rally, with the GBP/USD falling over 150 pips since reaching a high of 1.6500 yesterday. Nevertheless, fundamentals continue to improve for the country as mortgage approvals rose to 43,000-the highest in almost a year and the construction PMI reading jumped to 45.9 from 38.1.

The improvement in lending was also seen in net consumer credit rising by 0.3%, but it remains near record low levels and considering the quantitative easing efforts from the BoE more could be expected. The central bank is forecasted to keep its benchmark rate and bond purchase efforts unchanged at their upcoming meeting, which most likely means that they will not release a statement. However, we could see some type of report card on their efforts to improve credit conditions which could spark volatility. If the MPC shows that they are satisfied with their results and expect that lending standards will continue to ease then we may see further pound strength. Current sterling weakness may be an opportunity to get long, as potential to test the 10/30 high of 1.6675 remains, with 16820 the 50.0% Fibo of 2.0156-1.3491 as possible ultimate resistance.

The Euro has also been adversely impacted by easing risk appetite and has fallen as low as 1.4105 after reaching 1.4248 yesterday. Yet, we didn’t see any major reaction to the Euro-zone unemployment level rising to 9.2% from 8.9% which was the highest in almost a decade. Companies continue to be forced to lay off workers as they battle slumping demand and shrinking profit margins. Indeed, French producer prices fell 0.9% in April led by a 4.2% drop in mining, which will lead to further disinflation in the region and keep deflation concerns relevant. Swiss GDP contracting by 0.8% versus expectations for -1.5% in the first quarter and the country’s PMI reading improving to 39.8 from 36.5 shows that conditions are stabilizing in Europe and the Euro-zone the export driven economy’s main trading partner. The 50.0% Fibo of 1.6040-1.2326 at 1.4188 may provide resistance for the EUR/USD but a break above there leaves the 12/29 high of 1.4365 as the next target.

The dollar has managed to recover some of its losses from yesterday as markets have been quiet ahead of the major event risk on the week. Non-farm payrolls and rate decisions from several major central banks have left forex traders cautious. We may se some volatility from the upcoming pending home sales release, if it beats expectations of a 0.5% gain. Trades will need a greater improvement that the forecast in order to get reenergized about the housing market. We have started to see the sector show signs of stabilization, but signs of growth in could be the next catalyst to push risk appetite higher. Over the near-term downside risks remain for the dollar as improving fundamental data continues to have a greater impact than any negative news at this time, as markets are convinced that the worst is behind us and that the question is what type of recovery is ahead.

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