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Pound Hits a 7 Week Low Versus Euro

The Pound has lost ground against most currencies today due to lack luster economic data from the past 3 weeks all compound to paint quite a grey picture of the economy. Housing data yesterday showed a weakening market, retail sales were the lowest for a long time and trade figures showed that far from exporting our way out of trouble, exports are actually dropping.

The Euro has been the first currency to seize advantage by dropping the pound back below 1.1900 GBP/EUR support yesterday. Many investment banks including Goldman-sachs and Barclays are predicting further drops back to around the 1.1300 GBP/EUR support region over the next few months.

The greenback has also responded by drifting back towards the 1.5300 GBP/USD support which has held pretty well since August. The fundamental bias is still neutral but the technical picture remains moderately bullish.

Gold hit an all-time high on speculation the Fed may announce today a move toward further monetary easing, which added fuel to the precious metal’s drive higher.

Prices of long-dated U.S. Treasuries climbed before the Fed’s monetary policy meeting on Tuesday when policymakers could hint on the conditions for future purchases of government debt. With inflation verging upon deflationary ground and interest rates at an all time low it seems the US treasury are left with little option than to expand their QE program next month in a desperate attempt to shock the American economy out of its sub-standard slumber.

“There is plenty of pressure on the Fed to put forward what they are going to do to stop the U.S. going into a double-dip recession. It will be the main focus of the week and the market could go either way. We expect trading to be quite volatile,” said Will Hedden at IG Index.

The Fed is not expected to make any new monetary policy moves, but the post-meeting statement will be closely scrutinized for signals on the debate about whether further large-scale asset purchases are needed to support the sluggish recovery.

The Fed’s announcement can cause a good deal of volatility, it could spur another flight to the dollar as traders rush to pick up dollar denominated assets, alternatively we might see a massive dollar sell off as traders abandon the beleaguered Dollar for the Yen, the Swiss Franc or the Euro.

The Fed announcement is scheduled for early evening London time so we might well see a delayed reaction to any announcements and the currency markets might well open very choppy on Wednesday morning.

Clients with large dollar requirements are advised to have a stop order in place to protect themselves from any adverse moves. Because of the interconnected nature of the forex market clients with other currency requirements especially Euro buyers and Canadian/Australian dollar buyers should also consider protecting themselves with either protective orders for adverse moves or limit orders to take advantage of any swift spikes in their favor.

The amount of new debt held by the UK government in the long run, the public sector account must be in balance in order for the economy to be sustainable. If the UK spends more than what it earns, it must finance this budget deficit with an increase in Net Borrowing. If net borrowing posts considerably higher than expected that could be very bearish for the pound as traders can view a high budget deficit as unsustainable if it’s not accompanied by high GDP growth.

The pound remains vulnerable at the moment and even a medium impact data release can prompt traders to lose faith quickly.

Canadian dollar traders should be aware of the release of their key inflation release this afternoon. The Canadian CPI is likely to come in above expected figures due to the central banks surprising rise in interest rates earlier this month. The central banks usually have wind of the CPI figure before its release in order to better decide upon monetary policy. Clients with short term Canadian currency transfer requirements for corporate or private purposes should be cautious.