GBP Lower on Housing Concerns

After a week of increasing risk willingness and a sell-off in USD, the market reversed ahead of the important retail sales in the US. GBP really got hurt on subprime concerns.

MAJOR HEADLINES – PREVIOUS SESSION

• FR CPI MoM/YoY (Aug) out at 0.4%/1.2% vs. 0.3%/1.1% expected.

• FR Non-Farm Payrolls QoQ (2Q F) out at 0.3% vs. 0.0% expected.

• SW Unemployment Rate (Aug) out at 4.8% vs. 4.7% expected.

• IT CPI MoM/YoY (Aug F) out at 0.2%/1.6% as expected.

• E-Z Employment QoQ/YoY (2Q) out at 0.5%/1.7% vs. 0.5%/1.4% expected.

• SZ 3-Month Libor Target Rate raised 25bp to 2.75 pct. as expected.

• PD CPI MoM/YoY (Aug) out at -0.4%/1.5% vs. 0.0%/1.9% expected.

• US Initial/Cont. Claims out at 325K/2585K vs. 319/2580K expected.

• US EIA Natural Gas Storage Claims out at 64 vs. 61 expected.

• US Monthly Budget Statement (Aug) out at -$117.0B vs. -$85.0B expected. Prior at 36.

• JN Industrial Production MoM/YoY (Jul F) out at -0.4%/3.2% as expected.

• JN Capacity Utilization (Jul F) out at 104.4 vs. 105.5 expected.

THEMES TO WATCH – UPCOMING SESSION

USD

The USD is heading for another week of sell-offs ahead of the US rate decision on Tuesday. Fundamentally, today's retail sales and industrial production followed the line of weak figures, which adds a bearish to the USD. Of course the all-overshadowing focus is on the FOMC decision on Tuesday, where current market consensus is a 25bp cut to 5.00 pct. However several analysts are expecting a 50bp cut, but that will in our opinion not happen. EURUSD broke 2007 highs at 1.3852 and is looking to close the week above - we see next resistance at 1.3950. If this level is taken out, the big level to watch for is naturally the 1.40-figure, but we expect this level to be well protected.

USDCHF should finally break lower after the FOMC and we are currently targeting the lows from April 2005 at 1.1740. We will enter a short position if we see a break of 1.18.

Emerging markets

Subsequent to the announcement of last Friday's massively dissappointing U.S. payroll figures, and ensuing risk reversal in the market place, emerging marrket currencies suffered substantial losses, with TRY losing about 2 figures against EUR withing 1 hour of data announcement and peaking at 1.8041. The pair has since returned to pre-payrolls levels and trades in a range of 1.7650-7790.

Similar bullish returns are to be observed across the board in the emerging currencies field, as expectations of a Fed rate cut outlook has reignited the risk appetites, with HUF, PLN and ZAR all trading higher against the USD as compared to their respective pre-data levels, with the Zloty up about 8 whole figures.

Easy gains in more risk prone currencies, such as TRY and ZAR, on the back of a global liquidity injection can also be easily lost, however and for TRY today's Current Account data release can provide just that trigger for a counter move: The market is expecting a deficit of $-2.8B for the month of July, with the estimates stretching to $-3.5B on the worst end. With the foreign capital inflows playing a crucial role in covering for a trade deficit -largest among the emerging markets- Turkey is standing on a rather sharp blade with respect to the risk aversion moves.

Should worse than expected data catch the TRY off the guard, crucial reversal range to be watched are 1.2902-88.

After reports from Slovak Republic of monthly harmonized inflation falling 0.1% in August-second consecutive month of decline- EURSKK is seen pushing the key resistance levels around 33.74 area.

Note: the support/resistance levels used in the matrix’s of this document are levels derived from yesterday high, low and close. Reference in the text to other support/resistance levels will occur.