Talking Points

  • Japanese Yen: Slips to 97.50
  • Pound: Weighed By Lloyds Losses
  • Euro: Inflation Fall Further
  • US Dollar: Durable Goods Orders on Tap

Euro Weighed By Inflation Data, U.S. To Increase Stake In Citigroup

The Euro started to sell off ahead of the Euro-Zone inflation data as it dropped aver 100 bps to 1.2635 before finding support. Consumer prices in the region fell to 1.1% from 1.6% on lower energy costs. The prices falling further from the ECB's 2% target bolster's the case for another rate cut from the central bank. Meanwhile, unemployment in the region rose to a two year high of 8.2% as companies continue to cut costs as expectations rise that the current recession will deepen.

European equity markets were trading lower on the day despite the news that the IMF was sending 24.5 billion Euros in aide which also added to Euro weakness. The troubles of the developing nations has been a concern for the west and remains a weighing factor on the single currency as their economy and banking system are linked. The Euro remains range bound between 1.2500- 1.3000 and we may continue to see choppy trading leading up to the central bank's rate decision on March 5th.

The pound tumbled over 150 bps before finding support at 1.4150 as Lloyds Banking Group Plc reporting a loss on the HBOS acquisition and hadn't reached an agreement on the government asset insurance program. Meanwhile, consumer confidence slightly improved to -35 from -39, but the economic climate component fell to a record low. Britons remain sour on the economy and more news of banking troubles will only add to the dour outlook. The BoE is expected to cut rates by 50 bps on March 5th and the central bank will most likely announce that they will begin quantitative easing. Indeed, Governor King expressed the desire to boost then money supply yesterday as it has continued to slow despite the aggressive easing from the central bank. He also calmed fears that such actions would cause future inflationary pressures which could limit upside potential for the pound. Sterling continues to be locked in a range between 1.4150/00 and 1.4500. The 50-Day SMA at 1.4488 continues to provide strong resistance is a level to watch if we see cable appreciation.

The dollar continued to find support overnight as traders as risk aversion continues to be the dominate theme. The actions by the U.S. government have added to traders concerns rather eased their fears. The stress testing of banks has begun and already Citigroup has been asked to generate private capital and change their board of directors as the government intends to raise its stake to 40% in the beleaguered bank. The ultimate fallout from the banking plan is a large unknown and will remaining a reason for traders to remain on the sideline. The second reading for 4Q U.S. GDP will cross the wires today and is expected to be revised lower by 1.6% to -5.4% as the credit freeze stifled growth. Indeed, we saw durable goods orders for December revised lower to -4.6% from -3.0% which should drag the quarterly reading in the initial GDP print down from -7.3%. This could lead the personal consumption component to decline more than the -3.7% that is forecasted by economists. A deeper contraction in the fourth quarter will weigh in expectations for future growth and could increase expectations for more job losses. This would only add to the markets concerns and lend further greenback support.




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