Talking Points

  • Japanese Yen: Testing 98.00
  • Pound: BoE King To Increase Money Supply
  • Euro: Economic Confidence Falls To Record Low
  • US Dollar: Durable Goods Orders on Tap

Euro May Trade Heavy As Economic Confidence Falls, BoE King To Increase Money Supply.

The Euro found support during overnight trading as equity markets traded higher on the news that UBS AG replaced its chief executive officer and the U.K. government extended guarantees on bank assets. The single currency would reach as high as 1.2790 before finding resistance as weak sentiment readings have capped gains. Economic confidence in the region dropped to a record low of 65.4 from a revised lower January print of 67.2, signaling that further weakness is ahead for the economy as businesses and consumer continue to retrench. Meanwhile, Germany, the regions largest economy, saw a rise in unemployment by 40,000 as companies continue to slash payroll in anticipation of the further weakness.

The Euro continues to be correlated to risk winds and if the developments in the U.S. and the U.K. help lift equity markets then we may see the Euro regain its footing and look to test yesterday's high of 1.2900. However, the dour fundamental data only increase the chance of further easing by the ECB which could weigh on the single currency and send it lower with 1.2500 as support below. The euro/dollar continues to remain range bound and a test of the lower band is a distinct possibility after the recent failed test of resistance at 1.3000.

BoE governor Mervin King speaking at the UK Treasury Committee Hearing on the Banking Crisis said that the government needs to bolster confidence in banking system. Indeed, the extension of guarantees on banks assets was one measure that the government has already employed in this cause. The government has pledged top guarantee toxic assets which has banks shares soaring on the day. Royal Bank of Scotland Group Plc announcing that it would put 325 billion pounds ($462 billion) of investments into a state insurance program and shift toxic assets to a new unit after posting the biggest loss in British history sending. Sterling continues to finds support near the 1.4100 price level and has bounced from the level to test the 1.4300 price level on the banking news. However, comments from Mervyn King that the central bank will have to increase money supply have stalled bullish price action.

Tim Geither has revealed the assumptions for the banking stress test which includes an unemployment rate averaging 8.9% in 2009 and 10.3% in 2010, a 3.3% contraction in gross domestic product in 2009 and home-price declines of another 22% in 2009 and 7% in 2010. The details will may give traders a comfort that they can now forecast which troubled banks may fail which could give them confidence to invest in the stronger institutions. Therefore, we may see a pick up in risk appetite which could add to the dollar weakness that we saw in the overnight session. However, optimism may be limited as U.S. durable goods orders are forecasted to have fallen by another 2.5% in January after the 3.0% decline the month prior. The deepening recession has caused consumers to put off purchases of long lasting items. Americans are no longer able to pull money out of their homes to buy bigger ticket items as home prices in December realized an annualized drop of 18.5%. Existing home sales unexpectedly fell 5.3% in January demonstrating the consumer's willingness to wait for lower prices. Therefore, we could see a steeper than expected drop in demand which would lower growth expectations for the U.S. economy and could send stocks lower and the dollar higher. Initial jobless claims over 600,000 and another drop in new home sales would add to the pessimistic outlook.




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