Daily FX Market Outlook by AceTrader 26-1-2011

Market Review – 25/01/2011 23:04 GMT

Sterling tumbles after a shock contraction in the UK economy

The British pound tumbled from Asian high of 1.6018 to 1.5750 after the release of much weaker-than-expected U.K. Q4 GDP data which came in at -0.5% q/q n 1.7% y/y versus the economists’ forecast of 0.5% and 2.6% respectively, adding speculation that Britain could be entering a double-dip recession. British finance minister George Osborne said that the government would not change its austerity programme despite a shock contraction in the economy in the last quarter of 2010 which was driven by arctic weather in December. The British pound nose-dived from Asian high of 1.6018 to as low as 1.5750 after the data before recovering.  

The single currency rose to 1.3688 in European morning and then retreated to an intra-day low of 1.3573 on profit-taking together with the selloff in cable after oversubscribed eurozone rescue fund’s first debt offer. However, buying interest then lifted price and the single currency rose above 1.3700 to a fresh 2-month high of 1.3705 ahead of NY closing.  

The European Financial Stability Facility’s (EFSF) 5 billion euro offer was nine times oversubscribed, partly on Asian demand which included the Japanese government buying up over 20%. The order book for the issue closed with bids valued at 43 billion euros. High demand is likely to suggest confidence in the mechanism and in the whole euro system.  

The greenback traded narrowly against the Japanese yen in Asia and European morning. Although dollar once rose to 82.67 after the release of better-than-expected U.S. consumer confidence (which came in at 60.6, the highest level for 8 months since May), the price sank to 81.97 due to the fall in U.S. Treasury yield as a report showed that U.S. President Obama would propose a budget freeze on non-security discretionary spending and dollar then staged a recovery on short-covering in NY afternoon.  

The U.S. currency fell from 0.9523 to 0.9405 against the Swiss franc due to active cross buying in the Swiss franc as euro tumbled against the Swiss franc from 1.2985 to 1.2827. Australia Q4 CPI came out at 0.4% Q/Q versus economists’ forecast of 0.8% and the previous reading of 0.7% while Australia Q4 core CPI at a decade low of 0.3%. The data strongly suggests the Reserve Bank of Australia (RBA) would keep its cash rates unchanged at 4.75% at February policy meeting next Tuesday, particularly as the ‘Huge’ impact of the Queensland floods. Australian dollar weakened to 0.9927 after the release of lower-than-expected inflation data and then rebounded briefly to 0.9993 before falling again to as low as 0.9888 on dollar’s strength in European session.   

The Canadian core CPI were -0.3% m/m and 1.5% y/y in December respectively, against consensus forecasts of -0.1% m/m and 1.6% y/y. The annual core inflation edged slightly higher fm Nov’s 1.4% due to higher gasoline prices. U.S. currency rebounded against Canadian dollar fm 0.9912 to 1.0005 after the release of lower-than-expected Canada’s inflation data.  

Wednesday will see the release of Japan CSPI and BoJ monthly economic report, German import price index, UK’s BOE minutes, and US new home sales and Fed rate decision.

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