â€˘ Australian Dollar: Retail Sales beat expectations as demand remains strong
â€˘ Japanese Yen: Bounce in Nikkei drive yen well above 109
â€˘ Euro: Rally to 1.4750 fails but holds 1.4700 so far
â€˘ British Pound: 9 Month lows as fears of rate cuts grow
â€˘ US Dollar: Only MBA Mortgage apps on tap
The pound hit 9 month lows in overnight trade on growing fears that a slowdown in UK economy will force the BoE to make preemptive rate cuts at tomorrowâ€™s meeting of the Monetary Policy Committee. At present, the consensus call in the currency market is for rates to remain steady at 5.50%. But, a recent string of weak housing and consumer data including tonightâ€™s 10 month low in UK consumer confidence suggests that UK monetary authorities may choose to take a proactive approach to policy in order to counteract any rapid deceleration in growth.
Certainly, the opinion of the market is that the BOE will cut. As a result cable has been the weakest major against the greenback over the past month and hit a lifetime low against the euro in overnight trade, coming within a point of the 7500 figure. But what if the BoE decided to leave rates unchanged?
Despite the clearly deteriorating housing market and the slowdown in manufacturing, gauges of UK service activity actually surprised to the upside in December printing at 52.4 â€“ comfortably above the 50 boom/bust line. Furthermore money supply continued to expand at an alarming double digit pace recording a gain of 11.7% against forecast of only 11.1%.
Given the generally hawkish posture of BoE Governor Mervyn King, UK central bankers may choose to wait another month for further confirmation of economic weakness before enacting any changes. Yet even if the BoE decides to remain pat the pressure on the pound is likely to persist as the market is now convinced that easing is no longer a matter of if but a question of when. Still, having become so grossly oversold on the crosses, cable is due for a bounce. If BoE chooses to remain neutral tomorrow it may provide the catalyst for a retrace rally.
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Meanwhile, the euro hovers around the 1.4700 level as economic data continues to send mixed signals. German Retail Sales much like EZ Retail Sale missed the mark badly printing at -1.3% vs. 1.5% projected as the divergence in the region between strong producers and weak consumers continues unabated. Furthermore French Trade Balance data showed a record deficit as rise in energy costs drove imports higher. French Finance Minister Christine Lagarde said that she will push G-7 members to restore â€śbalanceâ€ť in the currency markets. French fiscal authorities continue to be the greatest opponents of stronger euro and will likely object vehemently to any attempt by the ECB to raise rates higher. Mr. Trichet and company of course exercise complete autonomy over the regionâ€™s monetary policy but given the lackluster trends in consumption and increasing political unease, we believe it will be difficult for ECB translate their hawkish rhetoric into action in Q1 of 2008 if economic conditions do not improve.
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