Talking Points

  • Japanese Yen: Mixed Across the Board
  • British Pound: GDP Disappoints in the Fourth Quarter
  • Euro: Eyes 1.385 on Inflation Outlook
  • U.S. Dollar:U.S. GDP Report on Tap

The British pound extended yesterday's losses against the greenback on the back of a disappointing economic activity report, leading the pair to break below its key support level of1.61, which coincides with the rising hourly trend line dating back to February 11th. Indeed, economic activity in Great Britain slipped 0.6 percent in the fourth quarter amid forecasts of a 0.5 percent contraction. At the same time, the annualized rate rose a mere 1.5 percent to mark the lowest reading since the three months ending in March 2010. Taking a look at the breakdown of the report, exports advanced 2.3 percent, while imports jumped 3.0 percent. Additionally, total business investment slumped 2.5 percent from the 3rd quarter.The data does not bode well for the region and makes policy increasingly difficult as inflation remains stubbornly above the central bank's target. Furthermore, growth is expected to come under pressure in the coming months as the government implements its largest spending cuts since the Second World War.

Indeed, there were warning signs from Bank of England policy maker David Miles leading up to the GDP report as he said that the U.K.'s recovery is fragile and added that we want to start bringing down inflation back down but if we decided interest rates were to go up, we need to know what impact this might have. All in all, the British pound could witness additional selling pressure as currency traders rule out a rate hike at the central bank's next meeting. Heading into next week's trade, market participants will shift their focus to Nationwide house prices, PMI manufacturing, and the M4 money supply. As the economic outlook remains unclear, disappointing reports could add color to the bearish picture.

Meanwhile, the euro is also under pressure as risk aversion regains its footing, while the disappointing M3 money supply added weight onto the weakened currency. On an annualized basis, the reading rose 1.5 percent in January to post the slowest level of expansion since October, leading the EURUSD to test Support at 1.3780. This level is of critical importance and if price action holds, I do not rule out a test back towards 1.385. Going forward, Monday's inflation report in the 17 member euro area will be placed in the spotlight as policy makers have been very hawkish as of late. A reading in line or exceeding forecasts could lead the euro towards the 1.39 area. On the other hand, a dismal report paired with the debt concerns in the bloc may hint at a key reversal point.

The dollar is mixed amongst its major counterparts ahead of the economic activity report in the world's largest economy. Heading into the release, economists are forecasting GDP to rise 3.3 percent in the fourth quarter after climbing 3.2 percent the quarter prior. As the greenback regains its footing, a better than expected report could set the stage for further gains in the buck.

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