European Central Bank (ECB) President Jean-Claude Trichet sounds off a more optimistic and hawkish tone at the ECB press conference, where he not only reiterates the usual vigilance to combat inflation, referring to it as “total alertness,” but also overshadows the downside risks to economic growth by accentuating that “confidence still points to ongoing growth” and strong job and consumption growth. Although there is very little in these remarks that points to a near-term rate cut, we do not anticipate any notable euro gains based on this hypothesis as markets will focus on the accumulating risks to the downside. Immediate risks stand at $1.4640 support, backed by $1.4600, with upside capped at $1.4740.
Sterling drops across the board despite the Bank of England’s (BoE) decision to not cut interest rates. Although we, along with 60% of the market, had been expecting a rate cut, we did indicate in our morning note that “a decision not to cut will likely trigger sharp knee-jerk reaction, which we do not expect to extend beyond the midday today as traders will judge the decision as a negative policy choice for the weakening UK fundamentals.” Indeed, sterling’s reactionary jump proved short lived as the market deems further BoE cuts to be inevitable amid prolonged house price declines, falling consumer demand and weakening inflation. While the consumer price index (CPI) stands above the BoE’s 2.0% target at 2.1% year-over-year, the figure has declined from as much as 3.1% earlier last year, while the core CPI hit a 13-month low of 1.4% in November, following October’s 1.5%. On a month-to-month basis, the headline CPI slowed to 0.3% from 0.5%. Not only has the inflation argument clearly diminished, but also inflation is at its lowest pace in the G-7, excluding Japan. The U.S. jobless claims also augurs badly for the falling sterling. More on sterling below.
Sterling fell near eight-month lows against the U.S. dollar at $1.9544, but may be boosted temporarily in the event of weekly jobless claims above 350,000 from the United States. We continue to deem sterling as the currency with the most cumulative declines in 2008, particularly against the higher-yielding Aussie, where rates are expected to further climb towards 7.00%. We expect cable to revisit its 1.9550 lows, and extend declines towards 1.9430. End of month target stands at $1.95, and end of month target at $1.88.
This afternoon’s speech by Federal Reserve Bank Chairman Ben S. Bernanke will shed light on the latest macroeconomic deterioration (unemployment rate, payrolls and ISM) but will not be sufficiently detailed in signaling the magnitude of the Jan. 31 rate cut. Such lack of clarity may be potentially negative for equities and risk appetite, in which case will prolong the steepening of the yield curve and drag USD/JPY, GBP/USD and USD/CAD.
Jobless claims fell 15,000 to 322,000, alleviating worries of prolonged weakness in the labor market especially after last week’s 0.3% jump in the unemployment rate to two-year highs and payrolls’ decline to four-year lows. The four-week average stands drifts to 341,000, not far from its two-year high of 344.5,000 seen three weeks ago.
Ashraf Laidi
Chief FX Analyst
CMC Markets US
a.laidi@cmcmarkets.comOffices
