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Euro, Pound Rebound as Gold Spikes

Last updated 1/26/2009 5:22 AM ET (GMT -5) 0 Comments - Add your comment

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Boris Schlossberg

Director of Currency Research, GFT

Top Stories

• Gold hits 900/oz as US China rift worries markets
• Most of Asia closed for Chinese New Year and Australia Day
• Barclay's writes down 11 Billion
• Equities mixed, but better bid into US session
• OIl at $45/bbl steady

Overnight Eco

• NZD Credit Card Spending -3.9%
• GBP BBA Mortgage Approvals 22.1K

Event Risk on Tap

• USD Existing Home Sales expected at 4.40M
• USD CB Leading Index expected at 0.3%

Price Action

• USD/JPY above 8900 as equities better bid
• AUD/USD off the 6500 lows as risk appetite, gold prices help
• GBP/USD rebounds to 1.3700 after testing 1.3500 on short covering and dollar weakness
• EUR/USD rallies to within 20 pionts of 1.3000 after selling off at start of session as dollar comes under doubt

With most of Asian and Australia out on holiday, the liquidity starved conditions in the currency markets created some exaggerated  movements in both euro and pound on the first trading day of the week, as both units fell hard at the start of  Asia trade only to stabilize and recover on better risk appetite as the night progressed.

Both the euro and sterling fell out of bed at the open of Asian session with pound testing its recent lows before slowly recovering into European trade. With economic calendar today essentially barren most of the activity was driven by risk flows as some very late dollar longs tried to push the two currencies lower.  However as risk aversion abated both the euro and pound were able to establish some support  with cable especially getting a lift from better performance of UK banking shares which were rebounding on LSE.  

One new factor in the currency market is the resurgence in the price of gold. We noted earlier that gold& #8217;s crossing of the $900/oz barrier signals that traders are “fearful that the safe haven status of the dollar may be compromised by China’s  unwillingness to provide further financing for US deficit spending and may result in a sharp spike in inflation as US tries to monetize its debt.”  

Euro benefited from this change in sentiment towards the greenback, but its gains were relatively muted. Unlike  the clear correlation over  the past few years when euro would appreciate in tandem with gold, today’s tepid rally suggests that the flow towards gold is really a sign of no confidence in any fiat currency as markets begin to worry about the inflationary dangers of monetizing the massive amounts of fresh sovereign debt issuance in the G-7 universe due this year

In North America , the focus of trade should turn to the LEI data due at 15:00 GMT. The market expects another negative drop but an improvement from the period prior. However, the forecast may be too optimistic given the latest weakness in US housing and jobless data. If the news continues to be dour it may spur another round of risk aversion helping the dollar and the yen in the process.  Yet the most important story today may be the price of gold. If the metal continues to rally unabated the greenback could come under pressure as its safe haven status will come under question.  

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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.