Wednesday, 26 November 2008 05:39:25 GMT
Written by Ilya Spivak, Currency Analyst
The Euro and the British Pound pulled back from US session highs in overnight trading as mixed results on Asian stock exchange painted an increasingly uncertain picture of risk sentiment. UK Gross Domestic Product and German CPI are set to offer predictably dour results, with forex traders likely looking past the European calendar to US releases for direction cues.
Key Overnight Developments• Euro, Pound Pull Back From NY Session Highs
• Risk Trends Murky as Stocks Send Mixed Signals Overnight
Critical Levels
The Euro pulled back below the 1.30 level in overnight trading having reached as high as 1.3080 in during the US session. The British Pound followed suit, edging towards 1.53 having fallen over 200 pips from the high at 1.5534. Technical positioning points to a bullish correction in EURUSD and GBPUSD in the near term before the dominant down trend regains momentum.
Asia Session Highlights
With no market-moving data on the economic calendar, trading in the forex markets took on a corrective tone overnight with the US Dollar recapturing a bit of lost ground after the sharp selloff in the US session. The greenback tumbled as risk appetite rebounded just before the opening bell on Wall St when the Federal Reserve announced it would commit up to $800 billion to boost credit access for consumers, homebuyers, and small businesses. The central bank said it would offer $200 billion in a program to extend lending directly to credit-seekers as well as spend $600 billion on buy up debt issued or backed by government-chartered companies like Fannie Mae and Freddie Mac. US Treasury Secretary Henry Paulson said the direct $200-billion facility was just a “starting point”, stressing that “It’s very important that lending continue to be available” in the absence of private firms’ willingness to dole out loans.
The US Dollar has been increasingly linked to risk sentiment since mid-August: traders cashing out their investments have seen USD as one of the currencies of choice to park their assets as the scope for future rate cuts from the Federal Reserve is substantially smaller than for other top monetary authorities (Japan excluded). The greenback has also picked up strength from safe-haven inflows into US Treasury bonds: there considered nearly risk-free because the only substantive risk to the investment is seen as a collapse of the US government itself. All told, EURUSD now shows a whopping 94% correlation with the MSCI Index of global stock performance.
Euro Session: What to Expect
The updated estimate of UK Gross Domestic Product is set to confirm the economy shrank -0.5% in the third quarter having seen growth grind to a standstill in the three months through June, bringing the economy the closest to recession in 17 years. Yesterday, Prime Minister Gordon Brown pledged to boost economic growth with the biggest fiscal stimulus package since 1991, injecting 25.6 billion pounds over two years into the economy via tax cuts and increased spending. According to Chancellor of the Exchequer Alistair Darling, the move will push the government budget deficit to 118 billion pounds, amounting to 8% of GDP. This is the biggest deficit the UK has seen since at least 1970 and the largest among the G7 nations. Additional monetary stimulus is also expected, with traders pricing in at least 125 basis points in rate cuts from the Bank of England over the next 12 months.
Germany’s Consumer Price Index is set to show inflation fell for the fourth consecutive month in November, printing at -0.3% to bring annualized price growth to 1.6%. The overall Euro Zone metric is expected to see consumer prices at 2.4% in the year to November. The rapid decline in the pace of price growth over recent months threatens the currency bloc with deflation as economic growth continues to falter. Indeed, the Euro Zone was confirmed to be in recession for the first time ever after GDP shrank for the second consecutive quarter in the three months through September. The European Central Bank is expected to slash rates by an additional 0.50% when policymakers meet again in early December, with at least 125 basis points in easing over the next 12 months.
On balance, risk trends continue to dominate forex price action. Stocks managed to close to the upside on Wall St despite a report showing US GDP contracted the most since 2001 in the third quarter, pushing the US dollar lower. Asian equity exchanges showed mixed results in overnight trading and US index futures are marginally in the red, down -0.5% head of the London open. With European economic data offering little that has not already been priced into the market, traders are likely to focus on the US Durable Goods and Personal Income releases due late into the session.
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Source : Dailyfx
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