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Will Euro and Pound Diverge In Post Announcement Trade?

Last updated 11/5/2009 5:35 AM ET (GMT -5) 0 Comments - Add your comment

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Boris Schlossberg

Director of Currency Research, GFT

Top Stories

• BOE and ECB on tap - QE key event risk to the pound, ECB to stay cautious
• UK IP/MP improves markedly suggesting economic activity picking up in Q4
• Asia sells off more -1.2% Europe down slightly
• Oil stays above $80/bbl
• Gold at $1091/oz still eyeing $1100/oz..

Overnight Eco

• NZD Employment Change -0.8% vs. -0.3% eyed
• NZD Unemployment Rate rises to 6.5%
• AUD Trade Balance -.1.85B vs. -2.13B
• CHF SECO Consumer Climate -30 vs, -37 forecast
• CHF CPI flat at 0.6%
• GBP Manufacturing Production 1.7% vs. 1.1%
• GBP Industrial Production 1.6% vs. 1.2%
• EUR Retail Sales much worse -0.7% vs. 0.3% eyed
• GBP BoE Rate Decision n/a
• EUR ECB Rate Decision n/a

Event Risk on Tap

• CAD Building Permits expected at 1.3%
• USD Unemployment Claims expected at 519K
• USD Prelim Nonfarm Productivity expected at 6.1%
• CAD Ivey PMI expected at 60.9

Price Action

• USD/JPY sells off remains above 90.00
• AUD/USD runs to .9080 as Trade data helps
• GBP/USD better IP helps lift it above 1.6500 but BOE looms
• EUR/USD capped at 1.4850 before ECB

A quiet, sluggish night of trade in Asia and early Europe as currency markets awaited the BoE and ECB rate announcements and risk FX  remained in a tight range ahead of those events.  UK Industrial and Manufacturing  Production data surprised to the upside and helped lift the pound to 1.6550 but traders remained wary of the MPC risk due at 12:00 GMT.

UK Manufacturing Production rose 1.7% versus 1.1% forecast while IP climbed 1.5% versus consensus calls of 1.2%. The news was yet another positive data point for the UK economy this week suggesting that economic activity may have reached a trough in Q3. If this trend persists  Q4 GDP should show growth for the first time in 7 quarters.  The market however was far more concerned about the upcoming BoE meeting awaiting the decision of the MPC regarding any additional QE measures.

The BOE has so far authorized 175 Billion GBP for its quantitative easing program and many traders speculated that it may increase that amount by another 50 Billion  GBP despite clear signs of improvement in UK economy.  BoE President Mervyn King has consistently stated that it is not the rate of change but rather the  absolute level of activity that concerns monetary policy officials and as such UK economy has a long way to go before reaching normal capacity.

If the BOE stands pat however, the news could prove very bullish for the pound which will now have the dual benefits of markedly improving fundamentals and a more hawkish monetary policy to support further gains.  Cable could spike to 1.6600 and EUR/GBP could test .8900 if  BoE decides to remain stationary for the time being.

In EZ the Retail Sales data disappointed printing at -0.7% versus calls for a 0.3% rise. This was the fifth straight month of contraction and the worst reading since December of 2008. Despite relatively buoyant business activity, the EZ consumer sector remains utterly moribund which  leads us to conclude that ECB will maintain its dovish posture for the foreseeable future. With price pressures nonexistent in the region , the European monetary authorities have little cause to tighten policy anytime soon and given the increasing stress of a rising euro on Eurozone’s  vital export sector we believe that at  today’s press conference  Mr. Trichet will be careful avoid any bullish rhetoric by reiterating ECB cautious economic outlook for 2010.     

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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.