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Pound Turnaround on Short Squeeze

Last updated 3/16/2010 7:02 AM ET (GMT -5) 8 Comments

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Boris Schlossberg

Director of Currency Research, GFT

Top Stories

• ZEW beats forecasts at 44.5 vs. 43.5 eyed
• RBA minutes suggest pause
• Nikkei tad lower but Europe up ahead of FOMC
• Oil at $79.79/bbl
• Gold at $1113/oz.

Overnight Eco

• AUD Monetary Policy Meeting Minutes
• CHF SECO Economic Forecasts
• EUR German ZEW Economic Sentiment 44.5 vs. 43.5
• EUR CPI 0.9% vs. 0.9%
• GBP DCLG HPI 6.2% vs. 3.5%
• GBP CB Leading Index n/a/

Event Risk on Tap

• CAD Labor Productivity
• CAD Manufacturing Sales
• USD Building Permits expected at 0.61M
• USD Housing Starts expected at 0.57M
• USD Fed Rate Decision expected at 0.25%

Price Action

• USD/JPY rallies to 90.60 ahead of FOMC
• AUD/USD trades quietly around .9150 after RBA minutes
• GBP/USD stages massive short covering rally after testing 1.5000
• EUR/USD can't break 1.3700 despite better ZEW

The pound staged a massive short covering rally in morning London trade piercing the 1.5100 figure after tumbling to 1.4980 a few hours earlier. The fall was triggered by critical comments from the European Commission which stated that, “"The overall conclusion is that the fiscal strategy in the convergence programme is not sufficiently ambitious and needs to be significantly reinforced. A credible timeframe for restoring public finances to a sustainable position requires additional fiscal tightening measures beyond those currently planned.”

However, shortly thereafter UK Treasury Secretary Byrne vigorously defended  the government’s actions stating that EU has “got its judgment wrong over the deficit.” The comments spurred a short squeeze which was aided further by much hotter than expected DCLG house prices which shot up 6.2% vs. 3.5% eyed indicating that UK housing sector is beginning to firm up.

Meanwhile in EZ the ZEW survey printed a bit better than expected at 44.5 vs. 43,5, but still lower than last month’s reading of 45.1.  This was the sixth consecutive monthly decline in the ZEW survey suggesting that economic activity In the region  remains stagnant as the worst winter in 14 years hurt construction and consumer spending. The euro could not clear 1.3700 on the news as traders remained cautious ahead of the FOMC decision later today.

The key focus in FX will be on the FOMC release which is due to come out later today at 16:15 GMT will be the “extended period language” in the post meeting statement. If the Fed changes the wording to a less dovish construct, the dollar should rally especially against the yen and could take out the 91.00 figure as markets begin to price in the possibility of rate hikes by the end of Q3 of 2010. On the other hand if the Fed leaves the language unchanged currency traders are very likely to be disappointed given the growing consensus that the US economy has finally turned the corner towards recovery with positive job growth imminent this month.

Ahead of the FOMC North American trade will get a glimpse of the latest US housing data with both starts and building permits due at 12;30 GMT. The expectations are for a decline in both  which give the harsh weather conditions is not surprising. However, housing has been the weakest part of the recovery story and may be the one critical factor to keep the  Fed stationary for a month more..         

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Comments (8)

alexjbrandt

March 16, 2010 at 07:11 AM ET

I've noticed that AUD/USD is constantly priced as xx.xx in your articles. Every time i read it, it temporarily throws me off thinking its the USD/JPY

bschlossberg

March 16, 2010 at 07:12 AM ET

Sorry typo I fixed it

alexjbrandt

March 16, 2010 at 07:28 AM ET

Alright no worries :)

rmsuleman

March 16, 2010 at 09:47 AM ET

FOMC @ 1615GMT? Can you check pls?

bschlossberg

March 16, 2010 at 10:36 AM ET

It is 14:15 EST so should be 18:15 GMT

Liverpinguin

March 16, 2010 at 10:10 AM ET

Hello Boris,

"The fall was triggered by critical..........."
"However, shortly thereafter UK Treasury Secretary............"
where is the best way to get that all information at the precise time, which kind of media do you use for your trading, CNBC, Bloomberg, Routers..... ?
I understand that for such volatility big money must be involve, Hedge Funds, Banks Trading Desk ....... to squeeze the shorts so quickly; and that they are reacting to the news as they you mention above, so they should be getting the same feedback, again the same question, how a small trader can get that information at home at the precise moment?

Regards and thanks to you a Kathy for the great fundamental analysis.

bschlossberg

March 16, 2010 at 10:37 AM ET

One of the best sources is the DJ newsfeed of GFT dealbok 360

Demax

March 16, 2010 at 04:42 PM ET

But that's not available on Dealbook Web is it?

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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.