Surely, the falling of UK Q4 GDP into the negative territory could contain the market sentiment weighing negatively on the British pound which has slumped below 1.58 versus the greenback after this dovish data which have shown that the UK economy is in serious need to the BOE easing support for stimulating investments spending during a time the UK economy suffering from increasing of prices can put it under emerging the stagflation risks as we have seen recently December UK CPI reaching 3.7% yearly while it was expected to be just 3.3% and increased worries from the MPC of having this rate above 4% which can tie the BOE hands from taking any action towards any direction and this was obvious in the minutes of the recent meeting of the MPC as Possen was voting for increasing the BOE buying bonds plan from 200b Stg to 250 and Andrew Sentence was voting for hiking the interest rate by 25 basis points while the others were unable to adopt any of these 2 directions fearing of accumulating the risks pressure of the other with these rates of inflation and weak economic performance to have 3 split ways inside the MPC and this stance can be prolonged saving the monetary policies out leaving the door for the financial authority which is actually having strong criticizing because of its austerity measures which were concluded to cause this impact on the growth rates in UK as the falling of the governmental spending component currently for saving the UK economy from the Debt crisis impact which looked another serious risk should be face since the beginning of Jan 2010 a year ago when we have had the first net borrowing deficit month since the beginning of 1993 reaching 4.3b Stg while the market was waiting for covering 2.8B Stg which pushed the cable at that time to fall more than 2 figures to 1.4782 directly after the release of it as it can drive the budget deficit ratio to GDP above 12% like Greece which have been already facing defaulting growing risks could contain the market sentiment in this recent year which watched making new record later in March 2010 when it reached its highest level since recording beginning 63 years ago with a very wider than expected deficit of the Public sector net borrowing at 23.5b Stg and at that time it could underpin the conservative leading a week before the elections which was on the 6th of May and today we have seen Public sector net borrowing in the U.K. coming at 15.3 billion pounds in December 2010 from 19.677 billion pounds in November which can put pressure on this governmental spending too worrying about the budget deficit exacerbating.
The cable next support is expected to be at 1.57 after these recent dovish data which dropped down 1.5835 supporting level and in inability of getting over this level again, it can be confirmed as a new resistance to face 1.57 then 1.558 while the main supporting level is now at 1.534 where it was its recent bottom but if the inflation worries could come back containing the market sentiment again the cable can be supported 1.6092 which has been formed top of the it in the beginning of last November at 1.6296 when the greenback was under pressure from the Fed's decision to add another 600b$ in another step of its QE policy for stimulating the economic growth in US and it is expected to give better economic assessment today after keeping this package unchanged last month.
The European stocks came under pressure from UK dovish GDP data of the fourth quarter driving the US stocks indices to have a red opening before recovering its loses by the end of the day supported by rising of US broad consumers confidence index of January to 60.60 from 52.5 in December which was expected to be just 54.5 to have a light green closing could not be caught by the European equities markets but the single currency could get use of this recovery rising to 1.37 after it has been tracing the cable weakness. The single currency next resistance versus the greenback is expected to be by god's will at 1.379 and this can form a stronger level as breaking it can open the way again to 1.4 psychological level while the way down should be met by supporting level at 1.326 where it has dropped to this week and this level can be followed by 1.309 and then the recent bottom of the pair at 1.287 level where it could rebound from recently by repeated Portuguese denying of the need for this made package by European countries and the IMF and the Japanese promises of buying European bonds this month could help it to rebounds dueled by markets cheeriness of successful bonds auctions in Portugal , Spain and Italy and also Trichet's reference to building inflation pressure in the Euro zone which has been repeated again highlighting a closer than expected tightening actions from the ECB can lead it to revise down its provided ample of liquidity for supporting the ailing countries of debt and raising the interest rate giving much care to the easing value risks of the single currency which continued to have better its recovery signs by new better than expected rising release of preliminary reading of EU Jan PMI non-manufacturing index to 55.2 while it was waited to be 54.2 and also Jan Manufacturing index which was nearly at it is similar strong pace of expansion by 56.9 coming down from expected 57.1 in December and this new data has come to show that there is no worrying growth downside risks can cap the ECB from tightening as they came after rising of the IFO Germane climate index to another all times high in January at 110.3 after reaching 109.9 in December and this strong figure has come after the recent better than expected January Germane ZEW economic sentiment which had come at 15.4 from 4.3 in December while the market was waiting for just 6.3 could and also January EU ZEW economic sentiment which reached 25.4 and the markets were waiting for 17.3 from 15.5 in December to underpin the growth outlook in the Euro zone fortified by strong economic expansion in Germany.
The market confidence in the US economy could add to the investors' asking for risks buying the high yielding currencies lowering their demand for the gold which has been hit again this week by the Saudi oil Minister's expectations of similar oil prices in 2011 to 2010 with increased probability of pumping more oil in the case of rising of the demand driving the oil prices down weighing negatively on the gold to fall below face 1329.$ supporting level and it is now trading just above it after finding hardly support at 1321 while the next supporting level is expected to be at 1315$ as the gold has come under pressure in the recent weeks getting down from 1400$ after reaching 1429$ by better US growth outlook could contain the market sentiment bringing back lost trust in the US economy and the investors' risk appetite of business spending in the greenback which is expected to be much credibly wanted this year having stronger yielding debt outlook reducing the market demands for safe haven stance currently.
The Japanese yen could also keep its gains trading currently at 82 versus the greenback which has been under pressure versus it by new expected extension tries for cooling the business spending for taking unsecured securities positions by Obama driving the treasuries yields down after the recent BOJ decision of keeping the interest rate unanimously from 0% to .1% revising up its real GDP median view strongly to 3.3% this year from 2.1% in its recent meeting in October keeping its median view of core CPI unchanged at in 2012 at .6% revising up it in 2011 to -.3% from -.4% referring to expected rising of the commodities prices can increase the inflation but it is expected to be moderate inflation with the recovery outlook this year.
The Australian dollar could also keep its gains trading parity with the US dollar which was under pressure in the recent days by improving of the market risk appetite after retracing recently to .983 negatively impacted by increased market expectation of continuation of the Chinese monetary tightening stance after its Q4 GDP came up yearly by 9.8% and it was expected to be just 9.6% with the Kiwi which has fallen recently to .7525 from .7785 undermined by lower than expected December all industrial activities index release which came down by .1% while the markets were waiting for rising by .2% from declining by .2% in November and also import prices in December came down by 3.8% quarterly while they were expected to rise by .9% from .8% a quarter earlier could come back above .765 ahead of .77 thanks to the improving of the market sentiment which pushed greenback.
God willing, it is important today we wait from UK for the recent MPC minutes and from US for the FOMAC economic assessment following its interest rate decision which is expected to be as it is between 0% and .25% adding now new funds to its QE policy as it has done in December.
FX Market Strategist
Walid Salah El Din