Market Wrap: Euro and Sterling Tumble, Yen Had a Roller Coaster Ride

Market Wrap: Euro and Sterling Tumble, Yen Had a Roller Coaster Ride

Market Overview | Written by ActionForex.com | Feb 07 08 23:57 GMT |

It was an extremely volatile day on Thursday with EUR/USD and GBP/USD tumbled nearly 1% after ECB and BOE rate announcements. There was significant change in tone from Trichet after ECB left rates unchanged at 4.00% as widely expected. In the introductory statement in the post meeting press conference, Trichet emphasized that "uncertainty about the prospects for economic growth is unusually high" and admitted some downside risks to growth is beginning to materialize. Trichet also acknowledged that "as the reappraisal of risk in financial markets continues, there remains unusually high uncertainty about its overall impact on the real economy." Also, "slowdown in the economies of some of the euro area's major trading partners is likely to have an impact on euro area real GDP growth in 2008" . Also Trichet admitted that whether growth in emerging markets can offset the U.S. was "an open question." After all, the conference was viewed by the markets as a signal that ECB is leaving the door open for a rate cut for the first time in five years. Sterling's decline accelerated after BoE cut rates by 25bps to 5.25% as widely expected and issued a dovish statement which signaled further rate cut is underway. The statement pointed out that "output growth abroad have deteriorated and the disruption to global financial markets has continued." Also, "credit conditions for households and businesses are tightening/" in UK. While higher food and energy prices would raise inflation, the impact could "fade later in the year". "The committee needs to balance the risk that a sharp slowing in activity pulls inflation below the target in the medium term, against the risk that elevated inflation pressures keep inflation above target." Markets will now look into the Inflation Report on Feb 13 and Minutes on Feb 20. The Japanese yen also had a roller-coaster ride with USD/JPY rebounding nearly 200pts towards the end of the session, partly following the path in the US stock markets. U.S. initial jobless claims fell by 22k to 356k for the week ending Feb 2. The initial claims now held above 350k for the fourth time since the breakout of the subprime problems. Pending home sales fell 1.5% in Dec and Nov's decline was revised from -2.6% to -3%. The pending home sales index, which leads existing-home sales by one to two months, points to another decline in existing-home sales. Regionally, pending home sales fell in all but the Midwest, where they rose 4%. Later on, stocks was helped by rumors of upward revisions to non-manufacturing ISM index. Broad based short covering was seen in yen crosses which in turn boosted the USD/JPY too. Dallas Fed Fisher, the lone dissenter to Fed's 50bps cut, said today he believes that before the FOMC's January 29-30 meeting, interest rates were already low enough to stimulate the economy and address the downside risks to growth. The Senate approved a $167 b fiscal stimulus package that calls for tax rebates. The plan differs from the one approved by the House, as it would provide rebates to older citizens and disabled veterans but would not extend unemployment insurance.

Source : Actionforex.com