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Will Pound Hit 1.5000?

Last updated 4/15/2009 5:22 AM ET (GMT -5) 0 Comments - Add your comment

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Boris Schlossberg

Director of Currency Research, GFT

Top Stories

• NYT - UK may have seek IMF aid as public finances deteriorate
• S&P expects a third of EZ junk bonds to default - UK Telegraph
• Equities lower in both Asia and Europe
• OIl below $50/bbl once again
• Gold quiet at $893/oz.

Overnight Eco

• GBP RICS House Price Balance -73 vs. -77 forecast
• AUD MI Leading Index -0.3% vs. -0.2% previous
• JPY Revised Industrial Production -9.4%
• EUR German WPI -8% year on year vs. -7.10% called
• GBP DCLG HPI -12.3% vs. -11.5% last

Event Risk on Tap

• USD CPI expected at 0.1%
• USD Empire State Manufacturing Index expected at -35.0
• USD TIC Long-Term Purchases expected at 27.2B
• USD Capacity Utilization Rate expected at 69.7%
• USD Industrial Production expected at -0.8%

Price Action

• USD/JPY rallies back to 9900 in European trade as equities turn green
• AUD/USD sells off below 7200 on rsik flows but stabilizes in Europe
• GBP/USD best bid overnight as 1.5000 in sight
• EUR/USD holds 1.3200 support for now

The euro remained under pressure throughout Asian and early European trade dogged by risk aversion flows and mounting concerns over the lingering  economic contraction in the 16 member union while the pound continued to rally approaching the key psychological figure of 1.5000. A story in UK Telegraph noted that fully one third of European junk bond credits could default on their debt as the export driven region sees no signs of pick up in demand.

The EUR/USD flirted with the 1.3200 level all night long as slow but steady stream of risk aversion selling weighed on the pair. Yesterday we noted that the US Retail Sales number would be key to near term directionality in FX, stating that “a dour number could trigger a wave of liquidation as both equity and currency traders take profits.“

The massive miss to the downside certainly dented the bullish argument that consumer demand has bottomed out and suggests that economic contraction may have further to go, but the markets will need to see more data points before deciding conclusively that this leg of the risk rally is over. For the time being the bulls were not giving up easily and high beta currencies staged a comeback by mid-morning as European equity markets turned green.

In contrast to the euro cable held up relatively well, benefiting from the unwind in the EUR/GBP cross which broke the 8900 handle for the first time in 6 weeks. Nevertheless UK housing data shows no signs of stabilization with the latest DCLG prices declining by -12.3% versus -11.5% the period prior. Today’s story in New York Times suggesting that UK may have to borrow from the IMF given the unsustainable state of its public finances, also weighed on the unit earlier in the session, but pound shrugged off  these concerns for now  and recaptured the 1.4900 level. With 1.5000 within view we believe that bulls will be very tempted to run the stops given even a sliver of opportunity in the US session, which carries a number of event risks on the calendar.

In North American trade today US CPI, TICS  Industrial Production and Empire Manufacturing will all compete for trader’s attention. The CPI data is unlikely to have much impact given the sharp decline in PPI gauges which is likely to keep price levels contained. Instead currency market players will focus on the Empire and IP numbers looking  for any evidence of pick up in demand. Finally the TICS data could be a pivotal release if the report shows further capital outflow from US. The market is looking for rebound of $10 Billion but if the TICS print negative for the fourth month in five it could send tremors  through the market as traders will begin to worry about the financing capability of  United States and the dollar could weaken irrespective of stock market flows.

 UK Home Buyers Begin to Resurface

FX Upcoming

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About The Author

Boris Schlossberg began his Wall Street trading career more than 20 years ago at Drexel Burhnam Lambert. There, he traded nearly every type of financial product on the market in the U.S., from equities and options to stock index futures and foreign exchange. His innate ability to analyze market information and use it to trade has helped him become an industry-recognized, “go to” trading professional.

These days, whenever the markets move, many organizations turn to Schlossberg for his take on the situation. He is a weekly contributor to CNBC's Squawk Box and a regular commentator for Bloomberg radio and television. His daily currency research is widely quoted by Reuters, Dow Jones and Agence France Presse newswires and appears in numerous newspapers worldwide. Schlossberg has written for publications like SFO magazine, Active Trader and Technical Analysis of Stocks and Commodities. He is also the author of Technical Analysis of the Currency Market and the co-author of Millionaire Traders: How Everyday People Are Beating Wall Street at Its Own Game with Kathy Lien. He joined GFT in 2008.