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Will This Week Give Euro and Pound a Reason To Rise and Shine?

Tue, Sep 2 2008, 14:12 GMT
by Lena Manousarides

FXGreece

What a week this one is turning out to be for the sterling!   The British currency broke an important psychological level of 1.80 following bad economic data and Alistair Darling's comments that the UK economy is suffering the most in 60 years were worsened with the prediction the economic crisis is set to continue into next year.

GBP/USD was trading at 1.8020 after the London closing and while US was on holiday the action was muted until Japan opened. The pair easily broke 1.80 in thin trading conditions and immediately dropped all the way down to 1.7850. Today it consolidated back to 1.79 but the move wasn’t strong enough to maintain its gains, therefore the pound slumped once more under 1.79.

Today’s economic calendar has ISM Manufacturing out from the US and is expected to print a negative number, however we think the reaction will be limited as the one thing in traders’ minds now is Thursdays BOE and ECB rate decisions; which are expected to really shake things up.

EUR/USD is trading below 1.45 and a daily close above that level could mean 1.44 is the next level. However as with sterling the move is now exaggerated and therefore we believe both pairs are nearing strong support levels with EUR/USD at 1.4380-1.44 and GBP/USD at 1.7660. One correction move might be coming soon and maybe the market is expecting Trichet's speech in order to begin the move upwards.

The rate decisions are expected to be both unchanged for ECB and BOE too, however some analysts are speculating that the BOE may surprise markets this week and cut rates. This scenario does seem a bit extreme as the pound has lost over 1500 pips in the last few weeks and therefore the Bank might not want to put further burden in the currency. Maybe a way to fight inflation is through a soft currency? Whatever the plan that King and his friends have will be revealed in the coming weeks and the pound will act accordingly. Let’s not forget that the traders have already priced in a cut in the rates and if that does not occur, the pound may be open for some needed gains.

The ECB rate decision will be announced on Thursday too, with market players monitoring Trichet's every word during his press conference. In his last meeting, the ECB President already told the markets that the Bank will have to see how the inflation is performing and will decide after September what they will do. The fact most traders are negative about the rate outcome, together with speculation that cuts are going to be the next theme for the Bank, are the main reasons for the Euros weakness. Therefore if Trichet does not back up rate cuts and asks maybe for further increases in the coming months, the Euro will have a reason to rise and shine.

The other important economic event this week is Non-farm payrolls, which is once again expected negative at -73000. Don’t forget the number is negative for the 8th consecutive month which certainly puts pressure on the US economy. Back in 2000 we had 10 consecutive months of negative payroll data and the country was already in recession. If by any chance the number is better than expected, the dollar might continue its strength without problems.

The other thing that was weighing on traders’ minds this week was Hurricane Gustav, which although feared severe, last night it was downgraded to a tropical storm and therefore the oil sold off below 110. That helped the dollar bid all across the board and made 1.45 level breakouts easier.

Today the action again is big and sterling together with euro are making new lows against the dollar by the minute. This trading action we think might be limited in the next few days, as Thursdays rate decision may make positions smaller and traders more aware.

Let’s see how the market will react with this week’s events and if the euro and pound are finally ready for a comeback!

Published on  Tue, Sep 2 2008, 14:16 GMT