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Forex Trader News – All eyes on the Fed

Posted on 27 January 2010 by Adey

Forex Trader News – Currencies Direct

The British Pound came under some selling pressure yesterday as the advanced Q4 GDP reading disappointed with a weaker than expected reading. Economic activity in the UK expanded only 0.1% in the fourth quarter of 2009 versus projections of a 0.4% rise, with the annualised rate slipped 3.2% from the previous year versus forecasts for a 3.0% contraction.

The tepid pace of recovery in the UK, could threaten further downward action in the pound if once again the ratings agencies look to cut the UK`s debt rating.

Yesterday morning also saw the release of the German IFO business confidence survey with the headline reading increasing to 95.8 from a revised 94.6 the previous month and the gauge for future expectations advancing to 100.6 from 98.9 in December, marking the highest reading since July 2007.

The US Federal Reserve ends its two day monetary policy meeting later this evening which is expected to yield little in terms of a policy shift but comes as the market waits to see if Chairman Bernanke will be confirmed in his post for a second term. His current term expires this Sunday.

Earlier this morning, Australian CPI data came in ahead of expectations at +0.5% quarter on quarter (versus mean forecasts of +0.4%) or +2.1% year on year (forecast +1.3%). The market is now pricing in the certainty of a further 25bps interest rate hike at next week’s meeting by the Reserve Bank of Australia.

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As usual, the trading periods between the Christmas and New Year holidays threw up some sharp moves, especially in the Dollar/Sterling cross, with one 24-hour session seeing cable trade up from 1.5850 to 1.6225 before settling back down below 1.6100. The few Banks still operating certainly enjoyed themselves….. Today we start with Sterling looking relatively firm and the Yen soft. Euro/Dollar, which didn’t experience the more extreme moves seen in cable, remains in the mid 1.43s. The Yen has been the weakest currency over the last month since the newly elected government embarrassingly forced the Bank of Japan to change its established tack and boost QE whilst expanding fiscal spending. This has renewed appetite for using the Yen as a funding currency and with expectations that interest rate differentials are set to widen against the Japanese currency, this trading trait looks set to grow, to the Yen’s detriment.

An article in the Wall St Journal today gives reasons for caution as we enter 2010, singling out the UK as having the worst fiscal position of all the industrialised nations, noting that, unlike several other headline grabbing countries, the UK does not have either an implicit or explicit guarantee from a friendly nation that stands behind its debt should things take a turn for the worse. Given that PIMCO (Pacific Investment Management Co), which runs the largest largest bond fund, have announced that it is cutting its holdings of both UK and US government issues owing to the spiralling debt burden in both countries, it suggests that Sovereign standing is going to be the focus going forward.

Sterling has also been lifted on the back of good economic data this morning. UK Manufacturing PMI came in at a 25 month high, mortgage approvals also came in much better than expected as did mortgage lending. Good start to the trading year for sterling.