More EUR, GBP Selling Ahead

by Ashraf Laidi
Oct 1, 2008 15:10

US August ISM plunges to 43.5, worst level in 6 years, undershootng expectations of 49.5. This number is not only recessionary, but underlines the notion that "rescue packages" are merely confidence builders and by no means solutions to the deepening economic slump. USDJPY seen extending losses towards 105.20. Despite these dismal US figures, we maintan our pessimism with the high yielding FX such as AUD, GBP (still seen at $1.76) and NZD. EUR eyes $1.3950. Tune in to my interview in the Media Section for my explanation on why the Fed should cut rates.

Dollar gains accelerated by smaller than expected 8K decline in ADP report on private payroll and by increased reports of short-term USD funding among European banks. The 10 am release of the ISM report may destabilize the dollar as long as the headline index remains above $48 (exp at 49.5v from 49.9). Traders are also willing to further punish the EUR and GBP as the ECB and BoE affirm their monetary policy intransigence.

Sterling Faces Further Losses Near $1.7600

A few hours after we warned of sterlings technically bearish pattern yesterday, the currency lost more than 3 cents from $1.8100 to $1.7750. We expect the pair to sustain further damage in the next 24 hours, extending declines below $1.77 and onto $1.76.
Although the Bank of England is expected to hold rates unchanged at 5.00%, the reaction is seen widely negative as markets are increasingly focused on the growth priority of central banks than inflation. GBP losses are even more justified by an eventual resolution at the Senate on the rescue package. Also helping the dollar is the smaller than expected 8K in September ADP report on private Payrolls vs expectations of a 50K, decline.

More EUR, GBP Selling Ahead - Multisep08 (Chart 1)

USDJPY Gains Capped at 106.50s

Propped by increased optimism that the Senate will pass the rescue package, and by the overnight gains in Wall Street and Europe, USDJPY managed to hold above the 106 figure, with occasional testing of the 106.30s. This mornings ISM report is apt to generate the needed push past 106.30s in the event of a figure above 48. But lack of clarity as to whether the Republicans in the House of Representatives will agree on a resolution as well as labor-market-related gloom ahead of Thursdays weekly jobless claims and Fridays payrolls may stem the pair below 106.60 and trigger fresh damage towards 105.30s.

EURUSD Dragged by Broader Dollar Buying

The final September manufacturing readings on Eurozone PMIs showed declines across the board. Those worked to further destabilize the euro following interventionist remarks from French politicians about the importance of the States hand in supporting local banks. Talk of a weekend meeting between leaders of France, Germany, UK and Italy and JC Trichet underlines the gravity of the problems on hand. Reports of increased short term USD funding at European banks is further driving the greenback against EUR, CHF and GBP. EURUSD faces initial support at $1.3980, followed by 1.3940.

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