Talking Points
- Japanese Yen: Continues Southbound Journey Against Most Counterparts
- British Pound: Remains Bounded by Descending Channel
- Euro: Inflation Estimate Tops Expectations in December
- U.S. Dollar: Fed’s Meeting of the FOMC Minutes on Tap
The British pound pared yesterday’s losses against the greenback as the U.K. PMI manufacturing report in December rose to 58.3 amid expectations of 57.2 to mark the highest reading in 16 years. Meanwhile, total lending advanced by 0.8 billion pounds in November from a revised 1.2 billion pounds the month prior. Though the PMI manufacturing bodes well for the region, the dismal consumer credit and M4 money supply is expected to keep price action capped by the descending channel as employment concerns surrounding the toughest spending cuts since World War II will keep a lid on the demand for credit. Not to overlook, banks will remain hesitant to lend this year as the economy will slow on the back of the government’s tough austerity measures. All in all, I expect the GBPUSD to reverse course at the 1.5650 level in the short term. A break and close above this region will warrant concerns for GBP bears.
Meanwhile, the EURUSD extended yesterday’s gains after the pair broke above its descending channel dating back to November 9th.The pair continued its northbound momentum today as the annualized Euro-Zone consumer price estimate rose 2.2 percent in December from 1.9 percent in November. Indeed, the rate of inflation was the highest since October 2008 and was led by increasing energy prices. The reading is of particular importance due to the fact that inflation pressures lead the European Central Bank closer to raising the benchmark interest rate. Though it is unlikely that the ECB will raise its borrowing costs as governments struggle to bring down their debts, the short term developments may provide the catalyst needed for the single currency to gain a short term boost before a larger correction takes place.
Taking a look at the news wire overnight, Spanish Prime Minister Joes Luis Rodriguez Zapatero said that the 2010 deficit to be “somewhat” better than target, and went onto add that a new round of stress tests on lenders will be carried out “immediately.” Moreover, Mr. Zapatero said it is important that China has confidence in the Spanish economy (due to the fact that China recently announced that it will buy Spanish public debt). Despite the optimism in the euro as of late, traders should caution a sharp shift in sentiment as yield spread between peripheral countries’ sovereign debt and German bunds continue to push higher, while confidence in debt is still eroding. At the same time, the tightening of fiscal policy by stronger states such as Germany and France provide additional hurdles for the 17 member euro area. In turn, the short upswing in the EURUSD may be short-lived.
The greenback rallied against most of its major counterparts on Monday, with the USDJPY extended yesterday’s gains. Going forward, currency traders will place the spotlight on the Fed’s minutes of the FOMC meeting which will be released at 19:00 GMT. The minutes are expected to show a discussion about the asset purchases and how it can improve its communication.
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