The Fed's awaited economic assessment came cautious and less optimistic than expected appreciating the inability of the current growth rate to relieve the depression of the housing market and stronger labor demand but they have mentioned their appreciation of the rising of the commodities prices as BOJ has done the same earlier this week but in the same time the Fed has kept their expectation of inflation to be well-contained taking a downward direction depending on the gauges excluding the food and energy which shows underlying inflation tending down. So, they have voted unanimously to keep the interest rate unchanged between 0% to .25% and their recent announced 600b$ of buying bonds in last November in what has been called a second round of their quantitive easing policy unchanged till the end of June for keeping stimulating the economy unworried about the inflation pressure.
The greenback came under pressure from this assessment which was waited to give a higher appreciation of the recent good economic data out from US as we have seen this week US broad consumers confidence index of January to 60.60 from 52.5 in December which was expected to be just 54.5 and since the beginning of this year, we have got outstanding December ADP Employment release coming at nearly triple of the market expectations of just 100k at 297k added jobs from 93k in November and Nov US factory orders data which have shown rising by .7% while the market was waiting for decreasing by .4% after falling in October by .7% and also both of US December manufacturing index and non-manufacturing index getting better to 57 and 57.1 consecutively after US December Chicago PMI had come at 68.6 while it was waited to be 61.5 from 62.5 in November which are the best since the ending of the credit crisis which could help the US treasury yields to keep rising and the US stocks markets too supported by potential rising of the earning reports of the fourth quarter of last year which lead the market to see that the US economy is much more credible for better business spending right now despite the labor market which is still looking struggling lagged behind the other sectors performance joining the Fed's worries about it as we have seen December non-farm payrolls which have just added 103k while the market was waiting for 135k putting pressure on the greenback to run out of stream across the broad since the release of it.
After the British pound had come under strong pressure falling below 1.58 versus the greenback as the falling of UK Q4 GDP into the negative territory at -.5% quarterly while it was expected to be .5% which have shown that the UK economy is in serious need to the BOE easing stance, it could come over 1.59 versus the greenback again following the release of the recent MPC meeting minutes which have %shown stronger than expected appreciation of the inflation upside risks giving another vote to sentence who was calling for hiking the interest rate by .25 from the MPC voting member Mr. Martin Weale to be 6 to 2 to 1 decision of keeping the interest rate unchanged at .5% and its buying bonds plan unchanged at 200b Stg instead of 7 to 1 to 1 in their earlier meeting as Possen is still favoring increasing of the buying bonds plan. The recent UK economy data have shown that it is 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 the tightening direction or the easing one for stimulating the growth which has shrunk in the last quarter of last year keeping everything unchanged fearing of accumulating the risks pressure of the other with these rates of inflation and weak economic performance which lead to these 3 split ways inside the MPC and this stance can be prolonged saving the monetary policies roles out leaving the door for the financial authority which is not actually in better position 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 again we have seen this week the 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 1.575 which has been reached after the dovish release of UK Q4 GDP followed by 1.57 and 1.558 then 1.534 where it was its recent bottom but if the inflation worries could continue containing the market sentiment it should face the psychological resistance at 1.6 then 1.605 which has been reached after the release of strong December UK CPI and in the case of passing it, it can meet another resistance at 1.6092 then 1.619 and after that formed top of the it which has been formed 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.
After the European stocks had come under pressure from UK dovish GDP data of the fourth quarter, it could join the US stocks indices gains which has started yesterday 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 and it continued today with the Fed's economic assessment which hinted to the markets that it is to keep its QE easing policy unfazed of the recent improving of the economic performance data out from US helping Dow to jump above 12000 before easing back below by the US session end.
The single currency could get use of this risk appetite recover which weighed negatively on the greenback to keep its gains around 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.
FX Market Strategist
Walid Salah El Din