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Pound Strengthens While Euro Struggles

Last updated 1/19/2010 5:47 AM ET (GMT -5) 1 Comments

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Boris Schlossberg

Director of Currency Research, GFT

Top Stories

• UK Core CPI jump is highest on record
• ZEW misses for third month in a row
• Nikkei and Europe both lower on concerns over US bank earnings
• Oil lower at $77.60/bbl
• Gold remains bid at $1138/oz.

Overnight Eco

• JPY Household Confidence 37.6 vs. 40.3
• EUR German ZEW Economic Sentiment 47.2 v. 49.8 eyed
• EUR ZEW Economic Sentiment 46.4 vs. 48.2
• GBP CPI 2.9% vs. 2.6%
• GBP RPI 2.4% vs. 2.1%

Event Risk on Tap

• CAD Leading Index expected at 1.1%
• CAD BOC Rate Decision expected at 0.25%
• USD TIC Long-Term Purchases expected at 30.3B
• USD NAHB Housing Market Index expected at 17

Price Action

• USD/JPY sold into 90.30's on risk aversion flows but fear of verbal intervention keeps 90.00 protected for now
• AUD/USD ranges between 92.70-92.20 as risk aversion flows weigh
• GBP/USD breaks above 1.6400 as M&A and hot inlfation data prove supportive
• EUR/USD hobbled by concerns over Greece as 1.4400 caps

Pound was the focus of attention in the currency market for the second day in a row boosted by M&A flows from the just announced Cadbury Kraft deal and the much hotter than expected inflation data for the month of December.  Cable soared to a six week high against the dollar at 1.6450 in the aftermath of  massive increases in core CPI readings  which rose to 2.9% from 2.6% forecast.

Although the hotter inflation data may be partially a function of one-off base effects, it nevertheless creates a serious problem for the BOE which on the one hand is mandated to maintain price levels below 2% and on the other is still in the midst of pursuing its quantitative easing program which is highly dilutive to the currency.  After its initial jump, cable gave back part of its gains dropping below the 1.6400 handle as traders assumed that the BOE will shrug off the data as temporary. Nevertheless, inflation concerns could make a comeback later this week if UK employment data shows marked improvement suggesting that the increase in price levels may be a partially the result of better economic growth.

Meanwhile in EZ the news was much bleaker, as finance ministers grappled with the problems in Greece while the ZEW survey printed far weaker than forecast coming in at 47.2 versus 50.4 the month prior.  This was the third month in a row that ZEW data printed worse than expected indicating that growth in the region may be stagnating as a result of unfavorable currency valuations and weak consumer demand.

We wrote earlier that, “Aside from the fiscal problems dogging the region, the euro has been weakened by market concerns that the economic recovery in the 16 member union is beginning to stall and this week economic releases could provide further proof to that bearish thesis.”  Today’s ZEW numbers  are  just the latest piece of evidence that the shorts are correct in their assessment. If this Thursday’s PMI data shows further  weakness in demand, the euro could test the bottom of its range at 1.4250 as sentiment towards the single currency sours considerably.

In North America today the TICs data is the only major release from the US and it may have some impact on the dollar trade if shows further capita outflows from US, but the most interesting event could be the Bank of Canada rate announcement given the loonies’ recent strength. The BoC previously indicated that the main risks for the Canadian economy is "persistent strength in the Canadian dollar that could act as a significant further drag on growth and put additional downward pressure on inflation."  However, as our colleague Kath Lien noted, “Unfortunately USD/CAD has fallen 400 pips since the last monetary policy meeting and we are already seeing the negative impact that the strengthening currency is having on the economy.” Therefore it will be interesting to see if the BOC tries to jawbone the little dollar lower given its adamant dislike for the parity level in the pair.

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Comments (1)

Fireball

January 21, 2010 at 01:49 PM ET

I still unknow where is the EUR/GBP support trend line, is there any stop around 0.87 yet?

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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.