The second reading of U.K. GDP confirmed that the economy is in a recession as the initial print of a 0.5% decline was confirmed. Yet, the personal consumption component was revised lower to 0.2% from 0.1% which was the biggest decline since 1995.
Talking Points • Japanese Yen: Consolidates Above 95.00 • Pound: Weakens On Contracting Growth • Euro: German Import Prices Drop • US Dollar: Durable Goods, Jobs Data On Tap Pound Falls As U.K. GDP Confirms Recession, Will Thanksgiving Holiday Bring Volatility? The second reading of U.K. GDP confirmed that the economy is in a recession as the initial print of a 0.5% decline was confirmed. Yet, the personal consumption component was revised lower to 0.2% from 0.1% which was the biggest decline since 1995. The Pound would weaken on the news dropping over 80 bps from its session high of 1.5444. The Sterling before the release was starting to pare its losses from the Asian session which saw it fall to as low as 1.5305. The continuation of declining domestic growth for the U.K. may lead to a prolonged recession as it also saw demand for its goods decline. Indeed, exports fell 0.3% for the third quarter as the credit crisis has weighed on global demand. There was hope that the weakening Sterling would bolster foreign demand. The BoE is expected continue their aggressive easing policy in order to soften the landing of the economy which will remain a weighing factor for the Cable. However, recent price action has seen some technical support and according to our Senior Currency Strategist Jamie Saettele “significant resistance does not begin until 1.60” After a brief breakout yesterday the Euro has returned back below the 1.300 price level which may signal that the 1.2400 – 1.300 range is still intact. This may present an opportunity to for trades to employ range strategies in their trading as the single currency may continue to trade sideways for some time. President Trichet acknowledged in an interview today that it appears the region will contract in 2009 and signaled that further easing is ahead from the central bank. However, the MPC leader would also make the case the growth would return in 2010 which was the same outlook that the OECD put forth in its forecasts yesterday. The prospect of growth on the horizon may limit the scope of the ECB’s easing which may become a supportive factor following the expected rate cut in December. Indeed, German import prices falling 3.6% in October provided further evidence that inflation is no longer a concern for the central bank which has acknowledged that prices will drop below its 2% target by next year. Yet, rhetoric ECB member Nowotny that the central bank should remain cautious and keep the powder dry demonstrates that the MPC will remain measured in its approach. Heading into the Thanksgiving Day Holiday we could see a sharp fall in volume today which could leave the markets susceptible to some volatility as institutional buyers may have greater sway over price action. Historically the day has brought sharp moves in price action as traders try and square bets heading into the extended weekend. We could see the dollar find support today as traders may opt to take their money out of risky assets for the safety of U.S. treasuries. The economic calendar may also present some event risk as a slew of fundamental data is due to cross the wires. The main driver may be U.S. durable goods orders as they are expected to have declined 3.0% in October. A drop in long lasting purchases would signal that consumers are continuing to retrench as the possibility of a deep recession increases. Indeed, personal spending is also expected to have contracted for a second month. Another week of jobless claims above 5000,000, a drop in new home sales and further contraction in Chicago manufacturing activity will also add to the grim fundamental picture for the U.S. economy. If fundamental data has sway over sentiment then we could see the dollar’s losses from yesterday continue. Will The EUR/USD Fall to 1.2000? Join us in EURUSD Forum Related Articles: U.K. GDP Contracts 0.5% as Domestic and Foreign Demands Deteriorate China's Central Bank Cuts Interest Rate by Most Since 1997 to Support Growth EUR/USD: Trading U.S. Durable Goods Orders To discuss this report contact John Rivera, Currency Analyst: jrivera@fxcm.com