Euro and Pound Slide as Concerns Over Recovery Mount

Last updated 7/6/2009 5:17 AM ET (GMT -5) 2 Comments

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Boris Schlossberg

Director of Currency Research, GFT

Top Stories

• G8 - no desire to address the reserve currency issue
• BOE may expand QE by 25B - Sunday Times
• Equities lower in Asia and Europe on weak US NFPs
• OIl drops sharply to $64.25/bbl as risk aversion grows
• Gold at $925/oz. last

Overnight Eco

• AUD: ANZ Job Advertisements -6.7% vs -0.2%
• JPY: LEI 77.0 vs. 76.2
• EUR: Sentix Investor Confidence worse -31.3 vs. -23.7 forecast

Event Risk on Tap

• USD ISM Non-Manufacturing PMI expected at 46.1

Price Action

• USD/JPY drops towards 9500 in equity weakeness
• AUD/USD lower but holds up relatively weel at 7900
• GBP/USD sold down to 1.6100 as risk liquidation continues
• EUR/USD tragest 1.3900 on the downside as enthusiasm fades

The euro and pound were sharply lower on the first trading day of the week as a fresh bout of  risk aversion and concerns over monetary policy weighed on the high beta currencies while the dollar and the yen gained across the board. With economic calendar in the EZ essentially empty, currencies traded mainly on risk flows as the investors lost their enthusiasm for the recovery trade in the wake of weak US NFP data last Thursday.  

The EUR/USD dropped sharply from the start of the European session hitting a low of 1.3911 just in front of the 1.3900 figure as traders reassessed the prospects for growth in the second half of the year. The dour attitude was supported by latest Sentix investor sentiment survey which slipped to -31.3 from -23.7 forecast. This was the first negative increase in the survey in five months and suggests that investors in the region are beginning to have doubts about the economic rebound. In our commentary piece we noted that disappointments in European economic recovery and persistent deflation in the region  could lead the ECB to consider lowering rates below the current 1% level which would align EZ monetary policy with the rest of the G-4 and would put further downward pressure on the euro.

In UK meanwhile the pound was also under  heavy liquidation after Sunday Times reported that the BoE may expand its quantitative easing program by anther 25 Billion GBP. Cable tumbled 200 points to 1.6100 before finding support. We continue to believe that the unit is vulnerable to further downside risks especially if the UK economic data continues to disappoint this week and equity markets correct further. The pound remains highly correlated and levered to the recovery trade and if risk appetite flows suddenly cease the pair could easily plummet through the 1.60 level and target 1.5500 on the intermediate term.

In the near term however, the high beta currencies could catch a bounce during the North American session  if the ISM Services sector release beats expectations. Markets are forecasting a mild increase to 45.9 from 44.0 the period prior. If ISM does improve it could provide a foundation for an equity rally which backdrop the slide in risk FX for the day. However, if the data proves to be a downside surprise, the negative sentiment already present at the start of the week will only be exacerbated and both EUR/USD and GBP/USD could fall below 1.3900 and 1.6100 levels respectively.

FX Upcoming

Comments (2)

ALEJANDRO

July 06, 2009 at 06:47 AM ET

Boris:
After several weeks GBP/USD has finally broken a 4h channel, other major pairs also made such formations and are now facing critical levels on 4h. based on concerns about 2Q and 3Q profits, Do you think we could be facing another big wave down to safe havens, with GBP leading the trend ?
Thanks

bschlossberg

July 06, 2009 at 07:14 AM ET

As i said I think pound is very vulnerable if UK data starts to disappoint and risk aversion takes hold. !.60 and 1.55 could be in view if those trends play out.

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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.