Euro, Pound Battered As Banking Concerns Grip Markets

Talking Points

• Japanese Yen: Dropped Below 89.0
• Pound: Falls Despite Improved Manufacturing PMI
• Euro: Led Lower On Banking Concerns
• US Dollar: Consumption, Income and Manufacturing Data On Tap

Euro, Pound Battered As Banking Concerns Grip Markets

The Euro fell to 1.2700 before finding support as the concerns over the banking sector and the global economy continue to drive price action. A break below this psychological level leaves little technical support before former congestion near 1.2500. The final Eur-Zone PMI reading for January fell to 34.4 from the flash estimate of 34.5 led by a decline in France. Yet, the reading was improved from December's 33.9 reading, which may signal that the sector is stabilizing.

Speculation that the sharp fall in inflation as was seen in the January CPI estimate falling to 1.1%, has raised the possibility that the ECB will cut rates again at their February meeting. The central bank following its last policy decision back it clear that the next meeting to focus on would be the March “rendezvous” as the MPC looked to asses the impact of the aggressive easing to date. Also weighing on the Euro is the concerns that the devaluation of Eastern European currencies will sink the region further into recession as the Ruble fell below the governments 36 rubles per dollar target exchange rate. 

The British pound sharply reversed after another failed attempt at the 20-day SMA dropping below 1.4200. The Sterling after its recent rally was punished by the flight to safety despite an unexpected improvement in the PMI manufacturing reading to 35.8 from 34.9. Barclay's had its long-term debt rating downgraded which added to the banking fears and sunk equity markets. The BoE is expected to lower its benchmark rate by 50 bps on Thursday, which may add to the pound's weakness. The central bank has been given approval to take quantitative easing measures by Prime Minster Gordon Brown and may outline additional measures following the rate decision. Therefore, we may see the sterling test 1.400 with a break below there leaving 1.3500 as the next target. However, given the unexpected improving fundamental data from the country, the pound may be the biggest beneficiary should risk appetite return. 

The dollar may continue to benefit from risk aversion flows as the global sell equity sell off is expected to continue into the U.S. session. Dow futures have been deep in negative territory during the overnight session as concerns over the banking sector continue to weigh on investor sentiment. The blue chip index is currently above critical support at 8000, a break below there could lead to an extended drop lower. Fears that the Obama “bad bank” may not be originated until late February has erased the relief rally from the original news. The economic calendar will not provide any relief as personal spending, personal income and manufacturing is all expected to have declined. Consumption in December is forecasted to have declined by 0.9% following a 0.6% drop in November. Mounting job losses and concerns that the current will recession will deepen have led Americans to retrench. This was evident in the significant drop in durable goods orders that we saw last week. The lack of domestic demand has continue to add pressure to the manufacturing sector which has seen overseas orders dry up as well. January's ISM report is expected to show the sector contracted for a twelfth straight month and fell to the lowest level in nearly 29 years at 32.5.

DailyFX