The Euro rally has backed off a bit today in anticipation of the Irish election, the results of which will not be available until over the weekend. Meanwhile, GBP is selling off on a downward adjustment to Q4 GDP and ugly consumer confidence survey. Next week will be a critical one for FX.
GBP suffering
The pound is suffering in today’s trade after a downward revision in the recessionary Q4 growth data (we also note with interest the expansion in government spending by 0.7% in the quarter versus the original estimate of -0.4%) and an ugly GfK consumer confidence survey, which shows UK confidence remains in the dumps. We’ve had mixed rhetoric from the BoE, with the noted dove Posen still arguing for expanding asset purchases due to the perceived risk of poor growth numbers and with a very hawkish Sentence out saying that the “time has come” for increasing interest rates and that delaying rate hikes could mean the need for sharper rate hikes later. The pound’s weakness and inflation are contributing. Note this hawk’s reasoning here: defensive rate hikes rather than hikes due to a strong economy. This is far less supportive of a currency than the kind of central bank mentality we have mostly seen in recent years of an economy’s strength driving asset markets and the inflation outlook. This is a significant strike against the pound as long as economies elsewhere look stronger.
The pound is suffering in today’s trade after a downward revision in the recessionary Q4 growth data (we also note with interest the expansion in government spending by 0.7% in the quarter versus the original estimate of -0.4%) and an ugly GfK consumer confidence survey, which shows UK confidence remains in the dumps. We’ve had mixed rhetoric from the BoE, with the noted dove Posen still arguing for expanding asset purchases due to the perceived risk of poor growth numbers and with a very hawkish Sentence out saying that the “time has come” for increasing interest rates and that delaying rate hikes could mean the need for sharper rate hikes later. The pound’s weakness and inflation are contributing. Note this hawk’s reasoning here: defensive rate hikes rather than hikes due to a strong economy. This is far less supportive of a currency than the kind of central bank mentality we have mostly seen in recent years of an economy’s strength driving asset markets and the inflation outlook. This is a significant strike against the pound as long as economies elsewhere look stronger.
Chart: GBPUSD
GBPUSD looked a bit shaky today on the news, though the currency finally made a bit of a stand against the Euro after that pair approached the 0.8600 level. The big support level for GBPUSD comes in at the 1.60 level, which was tried on the previous sell-off attempt mid-month. On a side-note, if the pound weakens due to the defensive stance of the BoE, why should the Euro be getting credibility for sabre rattling on inflation at the same time – especially when it has the added risk of the PIGS situation?
GBPUSD looked a bit shaky today on the news, though the currency finally made a bit of a stand against the Euro after that pair approached the 0.8600 level. The big support level for GBPUSD comes in at the 1.60 level, which was tried on the previous sell-off attempt mid-month. On a side-note, if the pound weakens due to the defensive stance of the BoE, why should the Euro be getting credibility for sabre rattling on inflation at the same time – especially when it has the added risk of the PIGS situation?
Looking ahead
Number one on our list to watch over the weekend has to remain the geopolitical situation around the world. Taking a snapshot, it appears that the market thinks it can get over a Libya going off-line and is trying to trust Saudi assurances that it can step in an fill the gap. We also have to worry whether new supply trouble spots pop up. But even before the advent of the oil spike, the rally in risk was spiraling out of control, so the question is whether the bull returns with the same force here even if oil prices fall sharply from here. In an environment of risk aversion and a falling oil price, the USD might have a better chance of making a stand.
Number one on our list to watch over the weekend has to remain the geopolitical situation around the world. Taking a snapshot, it appears that the market thinks it can get over a Libya going off-line and is trying to trust Saudi assurances that it can step in an fill the gap. We also have to worry whether new supply trouble spots pop up. But even before the advent of the oil spike, the rally in risk was spiraling out of control, so the question is whether the bull returns with the same force here even if oil prices fall sharply from here. In an environment of risk aversion and a falling oil price, the USD might have a better chance of making a stand.
On that last note, however, the next critical event for the USD’s fate is next week’s pivotal Humphrey Hawkins testimony (Wednesday before the House and Thursday before the Senate), in which Bernanke testifies before both houses of Congress and tries to both justify the path of Fed policy thus far and its plans for the future. While the hawkish minority within the Fed has been speaking with a much louder voice recently, the dovish majority is still too large at the moment to suggest that QE2 can be derailed. And the only thing that stands in the way of QE3 and beyond in the event of renewed US economic weakness is not dissent, but resistance from US lawmakers. Next week’s Q&A sessions after Bernanke’s testimony is the Congress’ chance to show that they have recognized the grand folly that is the Bernanke Fed and that they are willing to challenge it and stop the madness. Will they finally take the opportunity to stand in Bernanke’s way or sit and watch idly as the Fed continues to inflate its greatest – and final – bubble.
The other major event of the weekend is the Irish election, of course. It is taken as a given that the new government will be a Fine Gael/Labor coalition. The key question going forward is how the EU/IMF Irish bailout deal is restructured and how aggressively the new government moves to restructure the debt and impose a haircut on bondholders, not just whether the high interest rate of the rescue deal is lowered.
Next week could be pivotal for FX, so stay tuned. And have a wonderful weekend in the meantime!
Economic Data Highlights
- Japan Feb. Tokyo CPI Ex Fresh Food, Energy out at -0.3% YoY as expected and vs. -0.3% in Jan.
- Japan Jan. National CPI out at 0.0% YoY vs. -0.1% expected and vs. 0.0% YoY in Dec.
- Japan Jan. National CPI ex Fresh Food, Energy out at -0.6% YoY as expected and vs. -0.7% YoY in Dec.
- UK Feb. GfK Consumer Confidence Survey out at -28 vs. -27 expected and -29 in Jan.
- China Feb. MNI Business Condition Survey out at 58.2 vs. 61.1 in Jan.
- Norway Feb. Unemployment Rate dropped to 3.0% as expected and vs. 3.1% in Jan.
- Sweden Jan. Household Lending rose +7.7% YoY vs. +7.8% in Dec.
- UK Q4 GDP revised down to -0.6% QoQ vs. -0.5% original estimate.
- UK Dec. Index of Services fell -1.3% MoM vs. -1.1% expected
- Germany Feb. CPI out at +0.5% MoM and +2.0% YoY vs. +0.5%/+2.1% expected
- US Q4 Revised GDP out at 2.8% Annualized vs. 3.3% expected and vs. 3.2% original estimate.
Upcoming Economic Calendar Highlights (all times GMT)
- US Feb. Final University of Michigan Confidence (1455)
- US Fed’s Lacker, Diamond out Speaking (1515)
- US Fed’s Yellen, UK BoE’s Bean, EuroZone ECB’s Constancio speaking in NY (1830)
- New Zealand Jan. Trade Balance (Sun 2145)
- Japan Feb. Nomura/JMMA Manufacturing PMI (Sun 2315)
- Japan Jan. Industrial Production (Sun 2350)
- Japan Jan. Retail Trade (Sun 2350)
- Australia Jan. Private Sector Credit (Mon 0030)
- Australia Jan. RP Data-Rismark House Price Index (Mon 0030)
- Japan Feb. Small Business Confidence (Mon 0100)
- New Zealand Feb. NBNZ Business Confidence (Mon 0200)
- Japan Jan. Housing Starts (0500)
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