Talking Points

  • Japanese Yen: Tests 92.70
  • Pound: Rating Concerns Sink Confidence
  • Euro: Construction Output Falls To Lowest Since 1991
  • US Dollar: Housing and Manufacturing On Tap

Pound Drops On Britain Credit Rating Concerns, BoE Unanimous on Rate Cut and Quantitative Easing

The pound fell to as low as 1.4097 amid U.K. rating fears following an article in the U.K. Telegraph, which warned that Britain's AAA credit rating was in jeopardy due to the scale of the bank bailout. Sterling had reached as high as 1.4300 before the rating concerns as forex traders were starting to bet the BoE may signal an end to their easing cycle with the release of the minutes from their last policy meeting. The central bank had voted 8-1 for a 50 bps reduction with perennial dove David Blanchflower typically calling for a deeper cut of 100 bps. The outgoing committee member had warned of the current recession over a year ago and his call for further easing could influence the committee to cut by another 50 bps at their next meeting.

The central bank also voted 9-0 to ask permission for the authority to embark on quantitative easing. To the extent that further cuts in bank rate could not inject sufficient stimulus, the committee would need to use alternative policy measures, the minutes said. Indeed, the statements reinforced comments this week by Deputy Governor Charles Bean that the bank may start buying government debt. However, the committee also had concerns that further easing could be harmful to the economy which could lead them to refrain from further easing as they explore additional measures. The pound continues to find support at 1.4097 the 61.8$ Fibo extension of the 1.3548 – 1.4986 rally, which could signal that the upside risks may be greater. Indeed, we are already seeing sterling push higher from the technical level rising to 1.4200 post release.

After fighting its way back to an intraday high of 1.2640 the Euro dropped back to 1.2560 as the banking troubles of Eastern Europe continue to weigh on the currency. Buying out of Asia led to the initial push higher and bullish comments from ECB member Strak have led to the single currency finding a bid tone again as it has risen back above 1.2580. The committee member in a radio interview forecasted that the impact from the various government measures would stop the current downturn and led to stabilization by the end of the year. However, the lowest level of construction output since 1991 has dampened bullish sentiment and could lead to ore losses for the Euro. December construction output declined by 2.2% after a 1.7% drop the month prior dragging the annualized rate down to –10.1%. 1.2500 remains the key level to watch a break of the psychological support level leaves the October 27,2008 low of 1.2333 as the next support level.

The fundamental calendar is full of significant indicators that will give markets a look at the housing market and manufacturing activity. Housing starts in January are expected to have fallen to a fresh all-time low of 529,000 in January following 550,000 the month prior. Tight credit markets have dried up demand in the housing market, which has discouraged new construction. Although, the reduction of inventory will help stabilize home prices, but the lack of activity will be a weighing factor on growth in the domestic economy. Building permits are also expected to fall to a record low of 525,000 signaling that activity will continue to decline. Meanwhile, industrial production is forecasted to drop by another 1.5% following the 2.0% contraction in December as declining global demand combined with the local recession has stalled activity. The dour data may add to the prevailing pessimistic sentiment, which could add dollar support. The FOMC will also release their minutes from their last meeting which will give insights into the MPC's views on the state of the economy and what measures they may implement in the future. The prospect of additional measures from the central bank and the signing of the fiscal stimulus plan by President Obama could spark an increase in risk appetite and dollar weakness.




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