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Pound Pummeled as Fiscal Worries Trump Data

Last updated 2/1/2010 5:39 AM ET (GMT -5) 0 Comments - Add your comment

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Boris Schlossberg

Director of Currency Research, GFT

Top Stories

• EU gives Greece until May 15th to set its budget in order
• UK Manufcaturing PMI much better at 56.7 vs. 54.1 eyed
• Nikkei flat, Europe slightly down on the open
• Oil ralies back to $73/bbl
• Gold at $1184/oz.

Overnight Eco

• AUD AIG Manufacturing Index 51.0 vs. 48.5
• AUD MI Inflation Gauge 0.8% vs. 0.3%
• AUD HIA New Home Sales -4.6% vs. 0.3%
• AUD ANZ Job Advertisements -8.1% vs. 4.6%
• AUD HPI 5.2% vs. 3.7%
• NZD ANZ Commodity Price -11.7% vs. 15.7%
• EUR Final Manufacturing PMI 52.4 vs. 52.0
• GBP Manufacturing PMI 56.7 vs. 54.1
• GBP Net Lending to Individuals bit softed at 59K vs. 62K

Event Risk on Tap

• USD Personal Spending expected at 0.3%
• USD Personal Income expected at 0.4%
• USD ISM Manufacturing PMI expected at 55.7
• USD Construction Spending expected at -0.3%

Price Action

• USD/JPY rises to 90.50 as post GDP flow helps the dollar
• AUD/USD recovers above 8800 as risk flows return
• GBP/USD remains weak despite better PMI as fiscal worries weigh
• EUR/USD trades to 1.3900 finding support at 1.3850 level

A relatively quiet start to the week in the FX market with pound showing  the only noticeable weakness amongst the majors despite much better than expected UK Manufacturing PMI data. UK PMI printed at 56.7 versus 54.1 as the weaker sterling helped the gauge to register  its best reading in more than 15 years, but cable barely reacted to the report as concerns over the fiscal problems in the UK budget overwhelmed any positive economic news.

Over the weekend comments from PIMCO manager Bill Gross over the fragility of UK gilts as well warnings  in London newspapers suggesting that UK could face the same difficulties as Greece if it does not curb its deficit spending soon, weighed on the pound throughout early morning European trade. Furthermore, the UK  election landscape has become considerably more clouded over the weekend as the idea of a hung parliament became a serious possibility given the latest Yougov polls which showed no single party may win a majority in the election to be held on June 3rd.    

Nevertheless, the eco data should prove supportive as the market digests the implication of an export led UK recovery which should considerably improve GDP growth going forward. The UK manufacturing news not only surprised on the headline level but showed a marked improvement in new orders which jumped to 60.4 from 58.0. Pound remained under pressure in the aftermath of the release, but if can hold support near the 1.5900 level it could attempt a run back to 1.6000 as the day progresses.

Meanwhile EUR/USD rebounded off its long term support at 1.3850 to trade back to 1.3900 as final EZ Manufacturing data improved to 52.4 from 52.0 originally reported. The euro has been grossly oversold over the past month and a possible rebound to 1.4000 is due. However the unit remains hobbled by concerns over Greece and Spain and more importantly may lose is luster as a risk trade if US economic growth begins to surpass EZ activity. Last Friday’s US GDP number provided the greenback with clear momentum and if this week s data shows similar upside surprises the buck could begin to rally on relative growth dynamics rather than just safe haven flows.

Today’s ISM Manufacturing report will be the first important data point of  the week with the market looking for a 55.5 reading versus 54.9 the month prior. If the ISM data can surprise to the upside then the dollar could get a further boost against the yen, especially if the employment component shows any improvement.  Job growth is key to the sustainability of the US recovery and to that end any data that suggests a better than forecast NFP this Friday, should prove dollar supportive throughout the week.        

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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.