Talking Points

  • Japanese Yen: Found Support At 89.80
  • Pound: Falls On Interest rate Outlook
  • Euro: Industrial Production Falls To record Low
  • US Dollar: Advance Retail Sales On Tap

Euro, Pound Drop On Risk Aversion And Declining Interest Rate Outlook

The Euro fell over 100 bps below 1.2800 during overnight trading as the outlook for the European economy dimmed, adding to the heightened fears of an extended global downturn. Markets have become concerned that the impact from the efforts of the various nations to stimulate their economies won't be enough to pull the global economy out of it s current downturn anytime soon. The European monthly report reinforced these sentiments as it lowered its growth forecasts for the region to -1.7% from 0.3% on the year. Meanwhile, industrial production in the region fell 2.6% in December dragging the annualized number down to -12.0%, which was an all-time high.

Several ECB members signaled that the central bank would most likely cut interest rates at their next policy meeting. Markets are already pricing in a 25 bps reduction, which may continue to weigh on the Euro. President Trichet has been clear that the central bank doesn't see a zero interest rate policy in its future but we may see rates go below 1.0% by the middle of the year. Giving currenty momentum, we may see the single currency look to test the 12/2 low of 1.2561

Then pound also fell victim to investor fears and lower interest rate expectations as it dropped over 250 to below 1.2816 as risk appetite and lower interest rates expectations. The BoE in quarterly inflation report signaled that more a zero interest rate policy may be instituted by the central bank as it sees the downside risk to growth and inflation increasing. We could see the sterling lok to test psychological support at 1.4000 with a break there leaving 1.3720 as the next level of support.

The U.S. retail sales report is expected to show that consumer spending declined by 0.8% in January after a 2.7% drop the month prior. It would mark the seventh straight monthly decline as consumers have continued to retrench as companies continue to slash jobs. However, we could see a surprise to the upside considering that gasoline prices have stabilized which could lead to a significant rebound in gas station sales which declined 15.9% in December. No that it appears that the 'Obama Stimulus' is going to be passed; the outlook for consumer spending may increase with the expected tax cuts. Therefore, a mild decline in consumption in January could spark risk appetite, which could weigh on the dollar. However, risk aversion has heightened as fears grow that the aide by the various governments won't be enough to bring the global economy out of its current downturn.