Monday June 2, 2008 - 10:49:04 GMT
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Forex Research - Pound Pummeled by News of Lender Profit Warning
News that Bradford & Bingley, UKâ€™s biggest buy-to-let lender would issue a profit warning and have its chairman resign, stunned FX markets at the start of the week sending pound sharply lower
â€¢ Japanese Yen: Drops below 105.00 as equities sell off across the board
â€¢ Australian Dollar: Retail Sales fall, but inflation rises at fastest pace ever
â€¢ Euro: Holds steady as PMI Manufacturing remains above 50
â€¢ Pound: Pummeled by news profit warning from biggest buy to let lender
â€¢ Swiss Franc; GDP in line
â€¢ US Dollar: ISM Manufacturing on tap
Pound Pummeled by News of Lender Profit Warning
News that Bradford & Bingley, UKâ€™s biggest buy-to-let lender would issue a profit warning and have its chairman resign, stunned FX markets at the start of the week sending pound sharply lower on fears that the credit crisis in the UK financial system may worsen as the year progresses putting tremendous downside pressure on the whole economy. At one point cable was lower by two big figures hitting 1.9600 before rebounding slightly in London morning trade.
With clear signs that the UK housing market remains feeble at best, currency traders became concerned that the problems of the countryâ€™s financial sector will only increase in the second half of the year prompting the BoE to become much more accommodative in its monetary policy despite the anxiety of many MPC members regarding the rising threat of inflation.
Sterling also saw no help on the economic front as PMI Manufacturing declined to its lowest reading in 9 years and now stands at 50 midpoint between contraction and expansion. Furthermore, the housing sector continued to weaken with BBA mortgage approvals slipping to 58K from 65K forecast while overall lending declined to 6.4 Billion from 6.8 Billion projected.
At very minimum todayâ€™s news puts a halt to any speculation by pound bulls that BoE may consider a rate hike at this Thursdayâ€™s MPC meeting. In fact, despite inflation rates that are running well above BoEâ€™s target of 2%, UK monetary authorities will likely remain on the sidelines for the next several months waiting for the economy to stabilize before considering any tightening moves. However, should conditions deteriorate currency markets will begin pricing in additional rate cuts for 2008 and pound which has recently rallied on firmer interest rate expectations could drift downward once again towards the 1.9000 level.
The price action in the euro was considerably less dramatic as the unit generally held its Friday closing prices of 1.5550. EZ final PMI manufacturing data printed as expected at 50.6 providing some relief that the regionâ€™s industrial sector remained expansionary despite a very challenging environment of high exchange rates and high energy prices.
Last week, EURUSD was hurt badly by a series of negative news headlines from the EZ, but this week the data may prove be more euro friendly. Most importantly the focus will shift back to the performance of the US economy with todayâ€™s ISM Manufacturing the first of several gauges for the FX market to consider. If lower exchange rates are indeed helping US manufactures to export more, that thesis should manifest itself in todayâ€™s data allowing the greenback rally of last week to continue. If on the other hand the report shows no improvement the buckâ€™s advance may have run out of gas for now as everyone prepares for the NFPâ€™s.
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