Talking Points

  • Japanese Yen: Test 97.00
  • Pound: U.K. GDP Lowest Since 1980
  • Euro: German GDP Contracts Most in 22 Years
  • US Dollar: Existing Home Sales on Tap

Euro, Pound Give Back Gains On Weak Growth Data, U.S. Existing Home Sales Ahead

The Pound fell over 100 bps after the second reading of 4Q U.K. GDP confirmed that the country experienced its worst three month period of growth since 1980. Sterling had reached as high as 1.4600 before erasing its gains on the back of the bout of risk appetite that started in the U.S. markets. Although U.K. GDP figures remain unchanged at -1.5% versus expectations of a revision lower to -1.6%, weaker private spending figures raised concerns over future domestic growth. Additionally, the service sector which accounts for 70% of GDP also fell to -0.9% from -0.5%.

The weaker consumption and service sector data will squash any hopes that U.K. domestic growth could rebound in the near-term. Although we shave started to see retail sales numbers pick up, they are more a product of deep discounting then organic demand. Therefore, the BoE is expected to lower their benchmark rate by 50 bps at their March 5th meeting with quantitative easing to follow as it attempts to spur growth. These actions should adversely impact the pound which continues to find resistance at the 50-Day SMA at 1.4516. The Pound continues to trade in a tight range between 1.4100 and 1.4700 which has started to tighten which could a sign of a break out. Yet the 20-Day SMA has served as strong support and leaves the possibility of a more to the upside. Meanwhile, a report out of the E.U. has warned that the pound's weakness against the Euro could destabilize the U.K. economy which contradicts Gordon Brown's contention that it is beneficial as it would boost demand for exports.

The Euro reached as high as 1.2900 before final German GDP figures confirmed the country's largest contraction in 22 years. Although the reading was inline with expectations, the sharp lower revision in exports to -7.3% from -0.2% raised concerns of future growth. The German economy is dependent on demand for its products and the deteriorating global demand is expected to continue to weigh on the economy. The Euro/Dollar has continued to remain range bound between 1.2500 and 1.3000 and with lingering banking concerns and an expected rate cut from the ECB we could see the single currency look to test the lower levels of the range going forward.

Despite yesterday's brief bout of risk appetite which sent he dollar lower, traders remain cautious which is returning support for the greenback. Chairman Ben Bernanke's eased bank nationalization fears yesterday in his testimony to Congress, but the impact of his comments have lessoned as weak fundamental data from Asia and Europe remind markets that the global downturn is deepening. The existing home sales report is expected to show that a slight increase as home prices falling 18.55% has started to bring buyers to the markets. However, tight credit markets remain a barrier and could lead to a lower than expected print. President Obama in his address to Congress pledge the government commitment to boost lending which may raise hopes that the housing crisis could bottom in the near-term. Any significant increase in risk appetite should sink the dollar with its existing strong correlation to equity markets.




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