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Assault on Pound Continues for Second Day

Last updated 1/20/2009 5:38 AM ET (GMT -5) 0 Comments - Add your comment

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Boris Schlossberg

Director of Currency Research, GFT

Top Stories

• Pound breaks a 7 year low at it drops below 1.4000
• Obama to be inaugurated as President
• Chinese Unemployment increases for first time in 5 years
• UK bank bail-out could turn into a sovereign debt crisis - Financial Times.
• Oil at $35/bbl
• Gold $828/oz mildly lower

Overnight Eco

• NZD CPI -0.5% vs. -0.4% called
• NZD FPI -0.2% vs).8% last
• JPY Tertiary Industry Activity -0.9% worse than -0.8%
• JPY Household Confidence 26.2 vs. 27.2 forecast
• GBP CPI 3.1% hotter than 2.6% called
• GBP RPI 0.9% vs. 0.8% called
• EUR German ZEW Economic Sentiment 31.0 vs. -43.5
• EUR ZEW Economic Sentiment -30.8 vs. -46

Event Risk on Tap

• CAD Manufacturing Sales expected at -0.5%
• CAD BOC Rate Statement expected at 1.00%

Price Action

• USD/JPY tests 9000 on risk aversion in Asia but rallies a full figure as dollar sterngth kicks in
• AUD/USD pressured to 6600 off weak kiwi data and broad dollar strength
• GBP/USD crushed to below 1.4000 as depreciation continues for 2nd day in a row
• EUR/USD break 1.3000 on overall dollar strength

The assault on the pound continued for the second night in a row as the unit hit a 7 year low plunging through the physiologically critical 1.4000 level for the first time since 2001. FX traders feared that the massive new UK government spending schemes to rescue the ailing banking sector would result in further deterioration of country’ s balance sheet effectively devalued the currency by 3% overnight.  

As we noted earlier, “Needless to say the FX market reception to Mr. Brown's plan has been less than welcoming with the unit hitting all time lows against the yen near the 127.00 level as risk aversion reigns supreme.”  Cable was unable to hold support at the 1.4000 level despite the hotter than forecast CPI data which printed at 3.1% vs. 2.6% projected.

Although prices remain stubbornly sticky, well above  BoE’s 2% target rate, the focus of the market remains squarely on the deteriorating UK fundamentals which suggest that UK monetary authorities will have no choice but to lower rates further. UK authorities may find themselves trapped in a policy nightmare, as economic production contracts while inflation remains uncomfortably high  due to a rapidly depreciating currency. In order for cable to stabilize, traders will need to see some positive economic data this week – something that appears increasingly unlikely.

Meanwhile in Europe, the ZEW survey of investor sentiment surprised to the upside printing at -30.8 vs. -46.0 projected as respondents reacted positively to the proposed German stimulus package. Nevertheless, current situation index plunged to minus 77.1 from minus  64.5 in the previous month indicating that conditions on the ground remain difficult.

With the inauguration of President  Obama  on the schedule today attention will turn to Washington instead of Wall Street as the US economic calendar remains barren. One key event to keep an eye on in the North American session is the Bank of Canada rate decision. The market anticipates a 50bp cut but the more interesting question for traders with respect to BoC is whether Governor Carney will suggest that Canadian monetary authorities will follow the Fed towards the zero interest rate policy in the months ahead.

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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.