EUR/GBP dives after ECB and BoE delivered what markets expected, with ECB on hold at 2.00% while BoE cut 50bps to 1.00%. Though, the decline in Euro is somewhat limited after Trichet's comment took out the possibility of adopting zero interest rates in the Eurozone. Sterling remains firm across the board though. Dollar, on the other hand remains mixed in range after jobless claims surged to highest level since 1982. After all, the outlook in most pairs remains unchanged. Euro is expected to remain weak in generally, taking the Swissy down with it. meanwhile, dollar and yen will likely be mixed as there are countering effects from strong pound and weak Euro.
As widely expected, BoE lowered the benchmark interest rates by 50bps to 100% today, another record low since the bank was established in 1694. In the accompanying statement, BoE noted that the global economy is in the throes of a severe and synchronized downturn, with deteriorated sentiments as well as constrained credit supply. Meanwhile in UK, outlook dropped sharply in Q4 and similar rate of decline is expected in early part of 2009. Inflation to expected to fall below the 2% target by 2H09. While past interest rate cuts, easing in fiscal policy, depreciation in Sterling and falls in commodity prices would provide a considerable stimulus to economic activity, the MPC believed there are still substantial risks of undershooting the 2% CPI target in medium term. Focus will turn to Inflation Report on Feb 11 and meeting minutes on Feb 18.
ECB left rates unchanged at 2.00% as widely expected as markets will look forward to the important rendezvous in March. In the post meeting conference, Trichet said that recent data confirmed substantial downturn in Eurozone economy as well as decline inflation and level of uncertainty remains exceptionally high even though some signs of stabilization have emerged recently. However, Euro's decline was somewhat limited after Trichet said in the Q&A session that zero rates are not considered appropriate by the ECB.
On the data front, US initial jobless claimed jumped sharply to 26 year high of 626k. Preliminary Q4 productivity and labor cost rose more than expected by 3.2% and 1.8% respectively. Canadian building permits dropped less than expected by-3.9% in Dec. Germany factory orders dropped -25.1% yoy in Dec. UK Halifax house price, on the other hand, unexpectedly rose 1.9% mom in Jan, giving Sterling an early boost.
EUR/GBP Mid-Day Outlook
Daily Pivots: (S1) 0.8791; (P) 0.8932; (R1) 0.9022; More
EUR/GBP's break of 0.8801 confirms that recent decline from 0.9518 has resumed. At this point, intraday bias remains on the downside as long as 0.8928 minor resistance holds. Further fall is expected to 100% projection of 0.9799 to 0.8838 from 0.9517 at 0.8557 next. On the upside, above 0.8928 will turn intraday outlook neutral and bring consolidation. But recovery should be limited below 0.9082 resistance and bring fall resumption.
In the bigger picture, decisive break of short term trend line support confirms that rise from 0.7693 has completed with five waves up to 0.9799 (0.8195, 0.7808, 0.8660, 0.8234, 0.9799). More importantly, whole medium term rise from 0.6535 has probably completed the five wave sequence too (0.6867, 0.6678, 0.8186,. 0.7693. 0.9799). Hence, deeper fall is in favor to be seen to next key support zone of 0.8186/8234 (50% retracement of 0.6535 to 0.9799 at 0.8167). On the upside, though, above mentioned 0.9518 resistance will dampen this case and argue that price actions from 0.9799 is merely unfolding as sideway consolidation instead.