Pound Down - But Not Out?

Last updated 10/23/2009 6:08 AM ET (GMT -5) 5 Comments

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Boris Schlossberg

Director of Currency Research, GFT

Top Stories

• UK GDP shocks at - 0.4% vs. 0.2% eyed
• IFO misses 91.9 vs. 92.1
• Asia and Europe up slightly on last day of the week following US lead
• OIl mainatins highs at $81/bbl
• Gold steady at $1056/oz

Overnight Eco

• AUD Import Prices -3.0% vs. -2.6% eyed
• EUR French Consumer Spending 2.3% much better than 0.3%
• EUR French Flash Manufacturing PMI 55.3 vs. 53.3
• EUR French Flash Services PMI soars to 57.8 vs.54.0
• EUR German Flash Manufacturing PMI 51.1 vs. 50.2
• EUR German Flash Services PMI disappoints at 50.9 vs. 52.5 projected
• EUR German Ifo Business Climate 91.9 vs. 92.1
• EUR Flash Manufacturing PMI 50.7 vs. 50.2
• EUR Flash Services PMI 52.3 vs.51.4
• GBP Prelim GDP -0.4% vs. 0.2%

Event Risk on Tap

• USD Existing Home Sales expected at 5.39M

Price Action

• USD/JPY continues to move towards 92.00 as US yields exp to rise
• AUD/USD better risk flows push it towards .9300 but can't hold the level
• GBP/USD slammed into the ground with 1.6400 in view on horrid GDP data
• EUR/USD holds above 1.5000 as Frech data offsets German disappointment

A shocker of a GDP number sent cable plunging more than 2 cents in early European trade, injecting a massive doze of volatility into an otherwise calm currency market as the week approached its close. UK GDP printed at -0.4% vs. 0.2% contracting for the sixth consecutive quarter in a row – the worst performance in post war era.

There was absolutely no silver lining in the data with all sectors from production to consumption to construction showing declines. As we noted earlier, “Tonight’s news opens the way for further increases in QE which could prove very damaging to the pound in the short term.” However, the picture may not be as bleak as it appears. If the next batch of UK PMI data shows expansionary readings perhaps the BOE will shrug off tonight’s GDP contraction and will allow the economy to recover naturally. However, if economic activity begins to show signs of a slowdown, further QE measures are almost assured and cable will likely fall below 1.6000 once again.

Meanwhile in EZ the news was not nearly so dramatic, but not altogether positive as well. French economic data showed massive improvement with PMI Services rising to 57.8 and manufacturing climbing to 55.3, but the German reading were much more subdued. While German manufacturing did expand to 51.1 from 50.2 the month prior, PMI services actually declined for the first time in 5 months printing at 50.9 versus 52.5 forecast. Furthermore the IFO survey also missed expectations coming in at 91.9 versus 92.1 eyed.

“We’ve seen an improvement in expectations mainly in the manufacturing industry,” Ifo economist Gernot Nerb said in a Bloomberg Television interview. “To some extent a better export outlook has helped. In the longer run I think the exchange rate could cause problems.” We agree that exchange rate concerns will become more pronounced the further EUR/USD moves beyond the 1.5000 level and could impact the pace of growth going forward. This hesitation is being reflected in the price action as well, as EUR/USD breakout above the 1.5000 figure has seen very tepid follow through so far.

Nevertheless, the larger trend remains resolutely positive for risk for the time being and the pair could easily challenge the 1.5100 level later in the day if equity flows prove supportive. In North America the eco calendar contains only Existing Home Sales and a speech by Ben Bernanke. There is talk in the market that the Fed may signal a change of posture indicating the possibility of a rate hike as early as the first half of 2010, in part to stem the rapid decline of the dollar. If that scenario comes true our favorite way to play that theme remains through long USD/JPY position which has performed masterfully this week while the greenback continued to decline against all the majors with the exception of the loonie.

FX Upcoming

Comments (5)

jet

October 23, 2009 at 04:12 PM ET

lol that's a good one - the market has such a sense of humor the fed raise rates SOON I gotta see it to believe it - the fed is trashing the dollar purposely or so it seems - everytime the market gets this idea Helicopter ben comes along and squashes it - I've been burned more times buying the USD then i can count - you buy it first then I'll follow :-)

FXDragon

October 23, 2009 at 06:41 AM ET

So why is the rally usdjpy despite bad us data this week? I dont think the market is pricing a soon fed rate hike.

bschlossberg

October 23, 2009 at 08:02 AM ET

They ARE anticipating a more hawkish posture. No more rate will stay low "as far as the eye can see"

FXDragon

October 23, 2009 at 05:30 PM ET

So Boris, based on that rationale and adding the goood us housing data; are you changing your long term usdjpy posture from short to long? 'Cause i still feel short for some reason. It'll be interesting to see...

FXDragon

October 23, 2009 at 05:20 PM ET

Deal! I'll take this bet. I started selling rallies on eurusd, targeting around 1.47-1.46 in a 2 week time period. Timing is essential. Lets see what happens. It should be exciting...

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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.