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The pound extended its losses from yesterday that followed the BoE's announcement that they would be adding to their quantitative easing program by £50 billion.

Talking Points
• Japanese Yen: Under Finding Support As Risk Appetite Wanes
• Pound: Lower Despite Higher PPI
• Euro: German Exports Jump Supporting Hawkish ECB
• US Dollar: Non-Farm Payrolls On Tap

Pound Continues Losses; Yen Finds Support Ahead of US Non-Farm Payrolls

The pound extended its losses from yesterday that followed the BoE's announcement that they would be adding to their quantitative easing program by £50 billion. Sterling fell over 75 pips against the dollar, which was a sizable move considering that we are seeing tight ranges across other pairs with the US employment report looming. An unexpected rise in U.K. factory gate prices by 0.3% versus 0.0% failed to generate any bullish sentiment as the central bank clearly doesn't have inflation concerns with the added measures. Despite the monthly increase, prices fell 1.3% from a year ago down from last month's -1.0% but better than expectations of -1.7%. Additionally, input costs dropped 1.4% exceeding estimates of -0.8% and a sign that downward pressure may continue.

The MPC sent a clear signal that risk remains to a recovery by adding £25 billion more than had previously been authorized, which required them to petition the government. The Central bank expressed concerns that the financial conditions remain fragile as banks continue to look to bolster their balance sheets rather then pass out new loans. The bank also stated that the recession was deeper than originally expected justifying the added liquidity. Signs that the global economy is improving has tempered the bearish sterling sentiment but that could change if we start to see the level of improvement level off. The GBP/USD appears poised for a test of the 20-Day SMA at 1.6550 which has been a source of support since early July.

The Euro has been confined to a tight range throughout overnight trading as it continues to consolidate gains from its recent rally. Risk sentiment has been looking for a catalyst and the US employment report could be the source today. We have started to see the yen crosses come under pressure which could be a sign that risk appetite is waning. Hawkish comments from ECB President Trichet that further stimulus wasn't necessary has failed to inspire Euro bulls. The central bank leader would go on to say that the committee expects labor markets to improve in 2010 as growth returns. He also downplayed tight credit markets laying the blame for them at the feet of weak demand rather then restricted lending. The view was in stark contrast to the BoE and begs the question of whether the central bank's laid back approach is a misstep that will hurt its future growth prospects. A 7.0% jump in German exports and Italian GDP contracting less than expected supports the ECB's positive outlook and could equal continued Euro strength.

The dollar continues to show signs of firming as concerns grow that the recent rally in equity markets was a bit overdone. Current valuations may not justify future profits if the U.S. consumer remains cautious. It has been increasing unemployment that has keep Americans retrenched and expectations are that the economy gave away jobs for a nineteenth month. However, today's Non-farm payroll report is expected to show the pace of losses slowed to -325,000 from -467,000 which could raise hopes that job growth is nearing and consumer consumption with it. This could spur risk appetite and weigh on the dollar today. However, if the report misses as we saw with the ADP figures then look for the dollar to take back recent losses as growth concerns re-emerge.

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To discuss this report contact John Rivera, Currency Analyst: jrivera@fxcm.com