The dollar's year end recovery extended into Wednesday trading,
pushing the British pound beneath the psychologically key 2-level for
the first time since mid-September. With no economic reports released
from the US today, traders focused on prospects that the Bank of
England may cut interest rates again in January.
Richmond Fed President Lacker expressed his uneasiness with the
current inflation outlook, which he deems to have deteriorated since
August. He said that if energy prices fail to decline, monetary policy
decisions next year will be very difficult. However, Lacker said that
"most cogent risks" to growth are on the downside, but expects pickup
in 2008. He anticipates "very weak" growth over the coming months,
expecting 2008 GDP growth of 2-2.25%.
Traders will shift focus to tomorrow's US economic reports, including
the final readings for Q3 GDP, PCE prices, leading indicators, weekly
jobless claims and the Philadelphia Fed survey. The final reading for
Q3 GDP is expected to remain unchanged, at a robust rate of 4.9%. The
Philadelphia Fed survey is forecasted to decline to 6.0 in December,
down from 8.2 a month earlier.
Cable Plunges to 3-month low
The sterling slumped across the board, falling to its lowest level in
three months against the dollar at 1.9931. The initial catalyst for
the selling was the release of the Bank of England's December meeting
minutes, in which the BoE voted unanimously voted to cut interest
rates by 25-basis points to 5.5%. Markets had been looking for a less
pronounced result, with consensus estimates anticipating a 6-3 vote in
favor an ease. The minutes revealed deliberation for a larger and more
aggressive cut as a result of deteriorating growth, but opted instead
for a 25-bp move for fear of fuelling inflationary pressures. The Bank
also said, "The worsening financial market turmoil, and the consequent
tightening of credit conditions, had increased the downside risks to
activity and inflation in the medium-term". It is also worth noting
that this was the first unanimous vote to cut rates since November
2001.
Traders will turn to UK economic data due out on Thursday, consisting
of Q3 GDP and current account balance. The final readings for Q3 GDP
are seen unchanged at 0.7% q/q and 3.2% y/y. Meanwhile, the current
account deficit is expected to expand to 11.5 billion sterling, up
from the 9.05 billion sterling deficit from Q2.
Cable plunged through two big figures to 1.9931. Support begins at
1.99, followed by 1.9870 and 1.9830. Subsequent floors are eyed at
1.98, backed by 1.9750 and 1.97. Meanwhile, interim resistance begins
at 2.00, followed by 2.0030 and 2.0065. Further gains will target
2.01, followed by 2.0150 and 2.02.
Euro Pressured
The euro remains mired near two-month lows against the greenback
around 1.4330 as year-end position squaring continues to be beneficial
for the dollar. ECB President Trichet spoke earlier, reiterating the
Bank's stance to take whatever action necessary to ensure price
stability over the medium-term. Further, he said that recent liquidity
injections appease some market tensions but do not eliminate them.
Inflation data from Germany was stronger than expected with producer
prices for November jumping to 0.8% versus 0.4% a month earlier and to
2.5%, up from 1.7% in the previous year. The December Ifo current
conditions survey slipped to 108.1, down from 110.4 in November while
the expectations index was down slightly to 98.2 versus 98.3.
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