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Euro, Pound Run Into a Wall of Profit Taking Ahead of FOMC

Last updated 12/16/2008 5:41 AM ET (GMT -5) 0 Comments - Add your comment

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Boris Schlossberg

Director of Currency Research, GFT

Top Stories

• Auto bailout may be ready by Wednesday
• BOJ considering buying CP to aid credit markets
• All eyes on FOMC 50bp or 75bp?
• Profit taking main theme of the night in FX
• Oil at $45/bbl after hitting $50/bbl yesterday
• Gold maintains bid at $833/oz last

Overnight Eco

• JPY Tertiary Industry Activity 0.4% vs -0.2%
• AUD Monetary Policy Meeting Minutes
• AUD Housing Starts -10.7% much worse than -2.3% forecast
• EUR French Final Non-Farm Payrolls -0.2% vs -0.1% eyed
• EUR French Flash Manufacturing PMI 35.9 in line with 35.8 called
• CHF Industrial Production drops sharply to -5.2% from -2.2% expected
• EUR German Flash PMI 46.4 vs.44.0 forecast
• EUR Employment Change -0.1% vs. 0.2% last
• EUR Flash Manufacturing PMI 34.5 vs 34.3
• GBP CPI hotter 4.1%vs. 3.9%

Event Risk on Tap

• CAD Manufacturing Sales
• USD Building Permits expected at 0.70M
• USD CPI expected at -1.2%
• USD Housing Starts expected at 0.79M
• USD Fed Rate Decision expected 50bp Cut

Price Action

• USD/JPY trades towards 90.00 as traders anticipate FOMC cuts
• AUD/USD holds up well throughout the night at 6700 ahead of the Fed decision
• GBP/USD runs into a wall of profit taking ahead of 1.5400 despite hotter CPI
• EUR/USD trades to 1.3650 as PMI gauges remain depressed and traders take profit on the recent rally

After several straight days of triple digit gains both EUR/USD and GBP/USD stalled in early European session as traders locked in profits ahead of the FOMC decision scheduled for 17:15 GMT later today.  In relatively quiet night of trade the euro fell back from the 1.3700 level hitting a low of 1.3628 as data from the EZ showed continued weakness in both service and manufacturing gauges.   Cable dropped even harder to 1.5210 after reaching a high of 1.5477 yesterday despite hotter than expected CPI numbers.  

In Europe the flash Manufacturing PMI data showed that that sector remained in the doldrums with the reading of 34.5 vs. 34.3 forecast. The German flash PMI services number improved modestly to 46.4 from 44.0 forecast but remained well below the 50 boom/bust level. The news confirmed that the region is quagmired in a deep recession indicating that the ECB will have to lower rates continuously throughout 2009. As we noted yesterday euro's recent rally has been sparked by end of the year demand for yield as the unit remains the only G-4 currency with a better than 2% rate. However, the rally in the EUR/USD could run out of gas if the market begins to anticipate the fact that the yield differential will quickly melt away next year.

Cable also hit a wall of profit taking falling more than 100 points on the night despite the surprisingly hotter CPI reading which printed at 4.1% vs. 3.9% forecast. Nevertheless, the post data rally evaporated within minutes as traders speculated that BoE will ignore the bump in price levels given the overall weakness of the UK economy. At best, today’s hawkish inflation news may slow the pace of easing by Mr. King and company with rate lowered by 50bp in two monthly moves next year versus the initial expectations of a -100bp cut in January.  

As attention turns to the North American session all focus will shift to the FOMC decision at 17:15 GMT. The consensus call is for a -50bp cut, and we tend to agree with the market believing that the Fed will want to save some ammunition for next year. However if US monetary officials opt for a much more dramatic -75bp cut the greenback will become the lowest yielding currency in the G-10 universe and EUR/USD and GBP/USD may well recapture yesterday highs as the pressure on the dollar is likely to mount.

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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.