The 0.1% increase in February personal spending is the weakest in more than a year and wraps up a dismal week of consumer related data and heightens fear for the Federal Reserve that the credit crisis and economic slowdown is trickling down to an already overstretched consumer. Personal income rose by a robust 0.5%, following 0.3%
Core PCE price rose 0.1%, dragging the annual rate to 2.0%, from 2.2% and lower than the expected 2.1%. .
These figures are a stark reminder to market participants who may have grown complacent with the absence of systemic-risk related news ignoring the macroeconomic realities weighing on consumers and corporate earnings.
The British pound demonstrates why it may be the least favored currency amid the G-10 nations besides the U.S. dollar. The currency fell by more than 1.5¢ against USD, while hitting fresh record lows against at 79.20 pence against the euro. UK home price growth fell for the fifth straight month in March, while consumer confidence is hitting its lowest in 15 years. Earlier in December we called the pound the “dog currency of 2008” due to the fact that its high interest rates suggest the biggest downside ground for rate cuts among the industrialized nations, considering the pace of declines in housing and the implications for the highly leveraged UK consumer. With UK interest rates standing at 5.25% and the market pricing a 100 basis points in rate cuts for the year, such magnitude of rate cuts is behind the erosion of the currency.
The University of Michigan consumer sentiment survey’s final release for March is seen at 70 from the preliminary 70.5.
Euro powered by further ECB hawkishness
There are multiple ways for the European Central Bank officials to reiterate their inflation preoccupation, and each time they do so, the euro pushes higher across the board. ECB Gov Council member Axel Weber said the ECB would not cut rates any time soon and that present level of rates maintain price stability in the region. The fact that ECB officials are staunchly reiterating the suitability of current level of interest rates when the euro is at record highs suggests very little about a sharp a retreat in the in the currency any time soon. The comments were instrumental in shoring up the currency after an earlier decline following a drop in French consumer confidence.
Separately, German import prices rose 1.1% in February m/m, nearly twice the 0.6% rate in January.
EUR/USD is expected to maintain its consolidation within the $1.5760 to $1.5860 range, but U.S. consumer weakness is likely to test the 1.5865-70 resistance, after which we should see considerable downside pressure at $1.59. Oil prices continue to play a major role in boosting the pair, especially as they breach above the $107 level. Support remains underpinned at 1.5770, backed by 1.5720.
EUR/CHF Eyes four-week trendline resistance at 1.5755 as the franc drops on risk appetite and the euro is boosted by the ECB’s hawkish rhetoric. A successful breach is apt to extend gains towards 1.5820. Key target stands at 1.59. Support stands at 1.5650, backed by 1.5620.
Cable eyes further downside, capped at $2.0040
Pound under broad pressure after UK’s GfK/NOP consumer sentiment survey fell 2 points to -19 in March, reaching its lowest in 15 years, while Nationwide’s home price index fell 0.6% in March, translating into an annual rate of 1.1%, the slowest since March 1996. Separately, UK GDP growth rose 0.6% in Q4, matching the initial forecasts from 1 month ago.
Any rebound potential is seen capped at $2.0040, which may materialize on the back of weak US data. Renewed losses seen in the works, with interim target at $1.9970, followed by $1.9930.
EUR/GBP finally breaks above the 79.10 pence high to a new record of 79.20 pence. We expect further gains to as high as 79.40 pence, before a retreat down to 78.80.
USD/JPY probes 100 yen
The breach above 100.00 was short-lived after the 100.40 was quickly followed by a slide back to 99.70, where trend line support is detected. Subsequent support stands at 99.30. Stronger than expected Japanese inflation and rising unemployment had provided short-term yen gains before the retreat later in the Asian session. One day after Oppenheimer analyst Whitney predicted that Merrill Lynch and Citigroup will show a Q1 earnings loss, she is now anticipating that banks’ dividends will be unsustainable. Such events on the equity front continue to probe vital in gauging risk appetite and the course for the Japanese currency. Upside pressure stands too heavy at 100.20, followed by 100.40.
Ashraf Laidi
Chief FX Strategist
CMC Markets US
a.laidi@cmcmarkets.com
