The pound is the biggest loser of the day after the Bank of England (BoE) made the expected decision to cut interest rates by 25 basis points (bp) to 5.25%. The BoE statement confirms market’s expectation of gradual easing ahead, likely to drag rates to as low as 4.50%. All eyes shift to the key events of the day: U.S. weekly jobless claims; and the European Central Bank (ECB) press conference, both due at 8:30 am EST (see below).
Dallas Fed President Fisher’s speech at 1 pm EST may trigger further sell off in the event that Mr. Fisher lays out the case for his decision to not vote for last week’s 50 bps cut. In fact, Fisher didn’t even vote for a quarter point cut. Just like yesterday’s speech by Philly Fed Plosser signaling potential inflation risks weighed on the market, today’s speech may further erode confidence.
Further euro losses seen after ECB
Now that the ECB left rates unchanged at 4.00%, markets will focus on the 8:30 am EST press conference by ECB President Jean Claude Trichet, who is expected to maintain the balance between accentuating the upside risks to inflation while reiterating the downside risks to economic growth. We warn the euro could come under pressure in the event that Trichet does either of the following: 1) gives any signs that the Bank is anticipating a retreat in inflationary pressures; 2) signals a worsening in the economic dynamics of the euro zone. We do not expect Trichet to imply a possible change in policy following Societe Generale’s $7.1 billion losses, but the recent economic releases from the region may require a more subdued tone by the ECB. Recall that in last month’s press conference, the euro rallied across the board after Trichet sounded off a more optimistic and hawkish tone, where he not only reiterated the usual vigilance to combat inflation, referring to it as “total alertness,” but also overshadowed the downside risks to economic growth by accentuating that “confidence still points to ongoing growth” and strong job and consumption growth.
ECB hawkishness is increasingly perceived to be untenable and even threatening to the 15-nation area. Euro zone retail sales fell for the third consecutive month in December, reaching their lowest level in the 11-year history of the series.
Having broken below, the euro risks extending losses to as low as 1.4520 in the event that Trichet issues any hints of projecting a peak in inflation. Our $1.45 month-end forecast does not rule out lower levels before the end of the month, with a considerable possibility of the $1.43 being tested. The main upside risk for EUR/USD is for Trichet to maintain his hawkish anti-inflation tone in order to prevent any rapid declines in the currency. Upside capped at 1.4660. We expect broad euro losses for the month, albeit at lesser extent against the pound, with support standing at 0.7360. EUR/JPY projected to reach 150, with resistance capped at 160.
Sterling tumbles 1.5¢
The bulk of sterling’s losses occurred ahead of the Bank of England decision to cut interest rates, but the currency is now sold off across the board on indications that the central bank will follow a gradual easing policy. At its announcement, the BoE said "The Committee needs to balance the risk that a sharp slowing in activity pulls inflation below the target in the medium term against the risk that elevated inflation expectations keep inflation above target.”
The currency dynamics are in line with our pessimism for the pound. A U.S. jobless claims figure below 350,000 may not prevent further selling in the pound. We expect interim support at 1.9420, backed by 1.9380. Upside capped at 1.95.
GBP/JPY eyes 206.40, followed by 205.90, while GBP/CHF eyes 2.12.
Firm yen awaits jobless claims
The yen rose across the board as markets near the increasingly influential release of U.S. weekly jobless claims, carrying clues on the latest dynamics in the job market. Another reading above 350,000 following the prior 375,000 should be broadly positive for the yen as it triggers nervousness into already shaky U.S. markets. U.S. Stocks have given up all of last week’s gains, with the S&P 500 eyeing the 1,300 level. Japan’s Nikkei Index ended 107.9 points higher or 0.8% after having been down more than 500 points earlier in the session. But falling stocks in Europe may accelerate on disappointment that the Bank of England cut by only 25 bps. We may see further yen gains in the event that overall risk appetite is impacted by further hawkishness from ECB’s Trichet.
The pair will also be influenced by the latest speculations surrounding a credit downgrade of bond insurers FGIC and Ambac despite talk of a possible bail put package. USD/JPY is vulnerable to further declines towards 106. We may well see prolonged sell-off at 105.70 in the event of +350,000 in jobless claims. Upside capped at 106.65. Key resistance stands at 107.
Ashraf Laidi
Chief FX Strategist
CMC Markets US
a.laidi@cmcmarkets.com
