Risk currencies ran into a wall of disappointing data along with unexpected comments from Fitch ratings regarding UK debt causing the dollar to strengthen slightly in early morning European session. Fitch noted that UK was the most vulnerable of the G-4 economies to a ratings downgrade given its perilous fiscal position and those comments sent sterling tumbling nearly 200 points in late Asian trade before the unit finally stabilized. EUR/USD also had trouble gaining any traction stalling at 1.5000 level after a mixed ZEW report
David Riley, co-head of global sovereign ratings at Fitch, said if there was another significant fiscal stimulus package in Britain its rating would be at risk. As we noted earlier, “Despite an uptick in economic activity, the structural position of UK finances remains in a perilous state and makes sterling vulnerable to additional downside moves on even the slightest bit of negative news. Furthermore UK economy continues to rely heavily on the financial sector for its growth and as such is the most vulnerable of a the G-10 members to a sharp correction in the capital markets. Therefore, if equities begin to retrace into the end of the year, as investors try to lock in profits, risk aversion flows could quickly take pound below the 1.6000 level once again.”
Today’s UK Trade Balance data showed that the deficit widened materially to -7.1B vs. -6.2B eyed despite a strong improvement in exports to 19.4B from 18.7B the previous month. However imports rose at an even faster rate jumping to 26.5B from 24.8 B the period prior. Despite the deteriorating conditions in trade balance numbers the pound did not react negatively to the news as traders focused on the fact that rising imports connote better consumer demand.
In EZ the ZEW survey missed its mark by a wide margin printing at 51.1 against 54.0 expected, although the current conditions reading improved to -65.6 from -72.2 expected. The news suggests that investors see only a gradual recovery in Euroland with growth likely to proceed in “small steps”. Such a scenario argues for a protracted period of low interest rates and may temper euro’s gains going forward.
The pair continues to butt its head against the 1.5000 level, but so far has not been able to pull away from that barrier. As we’ve been noting repeatedly the global risk trade now finds itself at a critical juncture across multiple asset classes with S&P at 1100, Oil at $80/bbl, Gold at $1100/oz. and EUR/USD at 1.5000 all representing serious resistance. Yesterday’ surprising rally in the Dow provided further support for risk assets but whether the rally can continue for another day remains to be seen. Tonight’s eco results are mixed and currency traders may look to the IBD Eco Optimism survey due at 15:00 GMT for direction as the day progresses.
May The Force Be With You.
Eddie's Free Forex Class