Forex Trading

The British Pound traded sideways above 1.4030 in a session otherwise marked by US Dollar weakness as traders braced for the release of minutes from the last meeting of the Bank of England against the backdrop of further weakness in the labor market. Overnight data saw Westpac predict that Australia is likely in recession already while the Bank of Japan kept rates at 0.10%.

Key Overnight Developments

• Australia Likely in Recession, Says Westpac
• Bank of Japan Keeps Rates Unchanged at 0.10%
• US Dollar Extends Losses as Risk Appetite Improves

Critical Levels



The Euro extended gains in overnight trading, testing as high as 1.3055 against the US Dollar as risk appetite continued to improve. The British Pound traded sideways, consolidating at support above 1.4030.

Asia Session Highlights



Australia’s Westpac Leading Index fell -0.2% to a reference reading of 252.1 in January, the sixth consecutive month in negative territory. The annual pace of decline is -3.1%. According to Matthew Hassan, a senior economist at Westpac, “The leading index is now in deeply negative territory consistent with contracting economic activity.” The index has fallen to current levels only four times since record-keeping began 49 years ago and every instance preceded a significant recession. Australia’s GDP unexpectedly shrank -0.5% in the fourth quarter, the first negative print in 8 years, with a recession confirmed should the economy contract again in the three months to March. Minutes from the last policy meeting of the Reserve Bank of Australia said the central bank has “flexibility” to cut interest rates further, with overnight index swaps pricing in 75-100 basis points in easing over the next 12 months.

The Bank of Japan voted unanimously to keep interest rates at 0.10% as expected. Policymakers said they will begin buying bonds of maturities up to 10 years to lower long-term borrowing costs and promote lending. The bank reiterated that the economy has “deteriorated significantly” and cautioned that although they currently expect recovery late into the 2009 fiscal year, the outlook is highly uncertain. Japan’s current fiscal year ends March 31, 2010.

The US Dollar ended the session lower as risky appetite improved, pushing the MSCI Asia Pacific Stock index higher for the fourth consecutive day. Investors were encouraged after US economic data topped forecasts having viewed America’s economic health as synonymous with that of the world at large on expectations that a rebound in the world’s largest consumer market will have positive spillover elsewhere.

Euro Session: What to Expect



UK economic data tops the docket in European hours. The labor market is set to show continued weakness, with Jobless Claims rising by the most since March 1991. The Claimant Count Rate (the timeliest measure of unemployment) is set to rise to 4.0% in February, the highest in 9 years, while the ILO Unemployment Rate increases to an annual pace of 6.5% in the three months to January, the highest in 12 years. Job losses can be expected to translate into sluggish spending to weigh on economic growth, deepening the current downturn. Indeed, the International Monetary Fund has predicted that this time around the UK will see the worst recession of the G7 nations.

Against this backdrop, the Bank of England will release the minutes from the last policy meeting where Mervyn King and company suggested that the bank was done cutting rates and would now focus on quantitative easing. Indeed, the Monetary Policy Committee pledged to buy 75 billion pounds in assets, specifying that purchases of “medium- and long-maturity conventional gilts” will make up the “majority” of purchases over the next three months. This implies an active policy to drive down medium and long-term interest rates, signaling downward pressure on the British Pound in the months ahead.

Early data suggests Switzerland’s Retail Sales may reverse lower in January after December’s rebound to 3.6% as the UBS Consumption Indicator holds at the worst readings in 4 years. We had expected December’s uptick, noting that the SECO measure of consumer confidence rebounded from record lows as inflation came to a near-standstill, boosting Swiss consumers’ purchasing power. Looking ahead, the underlying fundamental environment is hardly supportive of continued strength. Unemployment has risen to 3.4%, the highest in over 2 years, and will weigh on disposable incomes as well as prompt precautionary saving. Further, the fallout in price growth will work against consumption if inflation expectations turn negative, encouraging consumers to perpetually delay purchases to get the best possible deal and putting the brakes on spending altogether. Indeed, the government said yesterday that it expects consumer prices to fall -0.2% through 2009. The prospect of deflation has seen the Swiss National Bank adopt the most aggressive posture of any major central bank: policymakers cut interest rates to 0.25%, announced quantitative easing, and said they were prepared to intervene in forex markets to prevent appreciation of the Swiss Franc.

Written by Ilya Spivak, Currency Analyst
Article Source - British Pound Stands Still as Traders Brace for Bank of England Minutes (Euro Open)