The HBOS housing survey in UK showed a much sharper decline than expected sending pound tumbling into the midday European session as speculation mounted that BoE may lower rates by as much as 50bp at the upcoming MPC meeting this Thursday.
â€¢ Japanese Yen: Breaks below 102.00 as risk liquidated
â€¢ Euro: Continues to power higher on safe haven bid but 5800 remains tough to break
â€¢ Pound: Poor HBOS sparks fears of 50bp cut
â€¢ US Dollar: Pending Home Sales on tap
The HBOS housing survey in UK showed a much sharper decline than expected sending pound tumbling into the midday European session as speculation mounted that BoE may lower rates by as much as 50bp at the upcoming MPC meeting this Thursday. According to HBOS, prices fell a whopping -2.5% versus -0.3% forecast indicating that the contraction in this key sector of the US economy is becoming more serious by the day. Price declined by their largest amount in 15 years as much stricter lending practices dampened demand.
House price inflation was the primary reason for BoEâ€™s staunch hawkishness over the past several years. However, with the sector clearly ailing and the price trends reversed, many market participants are beginning to anticipate a much more accommodative policy from the BoE going forward. Although we do not think the BoE will surprise the market with a 50bp cut this week, we do think that the Mr. King and his MPC colleagues will become more aggressive in their easing, most likely lowering rates on a monthly rather quarterly basis as we move into Q2 of 2008.
This readjustment of expectations is going to continue to pressure cable on the crosses especially if UK data displays further signs of deterioration. In overnight trade EURGBP once again approached the key 8000 level as traders started to price in the possibility of further rate cuts.
The EURUSD meanwhile continued to firm, trading above 1.5750 for most of the night. With economic calendar empty tonight, the unit continues to enjoy the positive momentum from last nightâ€™s surprisingly strong Sentix and Industrial Production results which have kept the decoupling theme alive at the start of this week. Despite the strong price action EURUSD continues to face stiff resistance at the 1.5800 level. It remains an open question whether it can overcome that barrier even if todayâ€™s US Pending Home sales print weaker than expected. We continue to believe that Mr. Trichet may moderate his typically hawkish posture at this months ECB meeting which in turn will cap any euro rally for the time being.
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To discuss this article please contact Boris Schlossberg, Senior Curency Strategist: [email protected]