* Japanese Yen: Finds Support at 89.60
* Pound: BoE Signals Quantitative Easing
* Euro: Trichet Continues Hawkish Rhetoric
* US Dollar: Obama's Team Already At Work
Pound Freefall Continues As BoE Signals Quantitative Easing, Unemployment Highest in Eight Years
The Pound dropped after climbing back above 1.4000, but failed to hold the level ahead of the BoE's minutes and employment data as traders started to price in further rate cuts and quantitative easing from the central bank. The Sterling would fall to as low as 1.3715 after BoE Governor King in a speech in Nottingham stated that officials may need to start buying assets in the next few weeks to promote lending. Meanwhile, the minutes from the MPC's last meeting showed an 8-1 voted to lower the benchmark rate by 50 bps, as perennial dove David Blanchflower called for a full %1 reduction. The tight credit markets continue to impact the economy which was evident in the employment report which showed jobless claims of 77,900 and the unemployment rate reaching the highest since 2000 at 3.6%
It is clear that a ZIRP is in the future for the U.K. and that has pressured the Sterling to the lowest levels since June 2001. The troubles of the banking system may ultimately force the government to nationalize banks and start buying corporate bonds and commercial paper to improve lending to businesses and consumers. Despite inflation remaining above the central bank's 3% threshold, Governor King still sees the risk of it falling below the 2% target which would justify lower interest rates and quantitative easing. Last month's meeting showed that the central bank refrained from a deeper rate cut as it feared it would sink confidence, but the current banking troubles and continued weakness in the labor market has accelerated the need for action. We could see the Sterling look to test the 2001 low 1.3680 before finding significant support. However, a break of this level would leave the Sterling susceptible to a possible drop to 1.100 with parity not far behind.
After failing to hold 1.300 overnight the Euro would fall back to support at 1.2850 before another move higher. Risk aversion flows had the single currency on the run before Hawkish comments from ECB President Trichet and other committee members fueled support. The MPC leader would reaffirm his contention that the region was not at risk for deflation and that it should be disciplined and maintain its medium term perspective. The comments would reinforce earlier ones by committee member Nowotny that there are no plans for a zero interest rate policy. The central bank signaled following its last meeting that no action was likely at their February meeting and that March would be the next rendezvous of importance. Another failed attempt at 1.300 could send the Euro down to previous congestion above 1.2500.
The dearth of fundamental releases on the U.S. calendar continues today with only the NAHB housing market index scheduled. The second tier indicator is expected to show a level reading of 9, which may be a signal that the housing sector has started to stabilize. However, giving the mounting troubles of the banking system, credit conditions may start to tighten again which will make it formidable for buyers to secure funding. The lack of demand may push battered home values even lower which will only add to the woes of the economy. Therefore, President Obama's economic team is fast at work to develop a bank bailout package that will be implemented along side the already proposed fiscal stimulus plan. The call for action may help ease market fears and spark risk appetite which could lead to dollar weakness. However, after U.S. equity markets dropped more than 4% and the weakness saw in Asia and Europe overnight, it is more likely that we could see more losses today and the safe haven flows add to bullish dollar sentiment.