* Japanese Yen: Finding Support At 50-Day SMA
* Pound: BoE Signal More Easing
* Euro: Sunk German Inflation Sinks
* US Dollar: Trade Balance On Tap
Pound Drops As BoE Signals More Rate Cuts As Economy In A 'Deep Recession'
The Pound reversed earlier gains from a better than expected employment report as the BoE signaled more rate cuts in its quarterly report as it lowered its forecast for growth and inflation as the country is in a 'deep recession' . The Sterling had rallied when jobless claims printed at 73,800 which were below economist's forecasts of 89,000. However, that was quickly negated by Governor King's prediction that employment would fall sharply in 2009, when unemployment is already at a 10 year high of 6.3%. After reaching as high as 1.4541 the Sterling would fall below the 20-day SMA at 1.4349.
The BoE is now forecasting that CPI will drop to 0.7% in the 3Q of 2009 and bottoming at 0.5% at the end of 2010. A weak pound is helping push prices lower as inflation risks continue to be 'modestly to the downside'. The central bank would also state that growth risks are 'weighted heavily to the downside' as it forecast GDP to contract by 4% in the first quarter alone. Although the committee has signaled that more easing is imminent, it stated that the impact of rate cuts have limited due to the failure of the banking system. Although Governor King would recognize that falling prices and a weaker pound is providing some stimulus to the economy it will take time for these effects and those of the recent rate reductions and stimulus to pass through the economy. If the 20-Day SMA fails to hold as support then we could see a re-test of 1.4000 on the lower interest rate expectations.
The Euro failed to break above resistance at 1.3000 during overnight trading after it erased most of its losses from yesterday. The single currency appreciation came despite German inflation dropping to the lowest level in almost five years at 0.9%. The ECB has remains staunch in its stance that deflation isn't a concern. However, disinflation is enough of a concern to cause the central bank to lower interest rates at its March meeting. This was supported by comment from ECB member Gonzalez-Paramo who said in an interview with Intereconomia radio. 'A rate of 2 percent is not the lowest rate we can think of, taking into account the situation right now, inflation expectations continue anchored and growth slowdown is intense'. Therefore, we may see the Euro remain range bound between 1.2700 and 1.3100 as risk appetite and interest rates expectations take turns driving price action.
We are already starting to see the dollar give back some of its gains from yesterday as risk aversion starts to ease. U.S. equity futures are pointing to a higher open as we may see bargain hunting after yesterday's selloff. U.S. Treasury Secretary Tim Geithner failed to inspire confidence when he unveiled the details of the banking plan. The lack of detail and specific action left traders concerned that the government still lacks a plan to deal with the toxic assets that have plagued the financial system. Therefore, we may see support for there green back continue until there are clearer signs that the subprime crisis has passed. However, the Senate passing the fiscal stimulus plan leaves one last hurdle before we see ratification of the bill which could spark optimism and weigh ion the dollar. The Senate and House have to reconcile the differences between their two proposals. Therefore, it may take until the early next week before we see final plan delivered to President Obama. Meanwhile, the U.S. trade balance is due to cross the wires and is expected to show the deficit shrink as U.S. demand continues to falter.