Talking Points

  • Japanese Yen: Bounced From Support At 90.90
  • Pound: Focus Turns To Inflation Report
  • Euro: Investor Sentiment Declines As Recession Deepens
  • US Dollar: Banking and Stimulus Garners Focus

Euro, Pound Pare Earlier Loses Despite Delay of U.S. Banking Package

The Euro would fall to as low as 1.2880 as risk aversion gripped markets when the U.S. delayed the announcement of the details of its banking recovery plan. However, the single currency would erase its losses despite more fundamental data point toward a deeper recession. Indeed, the German trade surplus narrowed from 9.9 billion to 6.9 billion in December as demand for exports fell for a third straight month. Meanwhile, the Euro-Zone Sentix investor confidence gauge fell to -36.1 from -34.1 which disappointed economist predictions of an improvement to -31.5.

Despite the ECB's aggressive easing at the end of 2008 and the beginning of this year European investors remain cautious as the region continues to show signs of further weakness. The central bank has signaled that they will cut rates again at their March meeting, which is when they will revise their growth and inflation forecasts. President Trichet has continued to reaffirm that deflation is not a concern for the central bank and that they don't see the need to approach a zero interest rate policy. However, as the cost of borrowing increases for many of the countries in the economic union including Portugal, Greece and Spain pressure will mount for the central bank to take further action. We may see the Euro continue to find support this week as risk appetite grows, but there are several key resistance levels ahead including 1.300, the 20-day SMA near 1.3100 and the 100-day SMA near 1.3300.

After falling to a intraday low of 1.4700 the Pound sharply reversed soaring to test 1.4860 on increased London buying. Interest has increased ahead of the BoE's quarterly inflation report due out February 11th as it is expected to show that prices have started to stabilize and the central bank will most likely indicate that further easing isn't warranted. The MPC lowered its benchmark rate by 50 bps last week bringing it to 1.00%, the lowest in its history since 1694.

The status of the U.S. government's fiscal stimulus and financial recovery plans will dictate investor sentiment today with an empty economic docket. U.S. Treasury Secretary Timothy Geithner announced that the banking plan would be delayed as the new administration tries and pass the stimulus plan, which remains on shaky ground. Although both parties have reached some common ground on the details of the bill, there still remains significant opposition to the government spending as the public grows less in favor of it. Despite the obstacles it appears that the aide package will be passed this week, which may fuel risk appetite and weigh on the dollar. However, traders have started to question the impact of the stimulus on the economy and whether it would be enough to pull the country out of a recession. Speculation has grown that GM and Chrysler may be forced into bankruptcy to assure payment of the government loans they received, which could offset much of the impact of the aide package. Therefore, we may see support for the dollar remain strong as traders proceed with caution.