Earlier this week the euro got a boost from a very successful auction of €5B European Financial Stability Facility (EFSF) notes intended to be part of the bail out money for Ireland. With Japan and China taking 38% of the issue, there were 9 bids for every one euro note offered. Intoxicated with the auction's success, Klaus Regling, head of the ESFS said: "It is the biggest order book ever. We will check before notifying the
Guinness
Book of Records but nobody can remember anything like that in the
world." The euro five year note was attractive, yielding 2.89% compared to a five year US note yielding 1.98%, or a meager .49% in Japan.
This gave the euro a boost, probably enticing more spec buying, but as we approach the end of the week, the euro is losing some of it's luster, and is now trading under 1.36 after early trade at 1.3750. Yes, the initial euro auction was a success, but this week the US Treasury, with no fanfare, sold $99B of two, five and seven year notes.
This morning the US Advance GDP was released. The the headline number, an
increase in the GDP of 3.2% was above the previous quarter's 2.6% but below the average guess of 3.5%. Perhaps the markets initial reaction was disappointment, but this is the strongest growth rate in five years. While largely ignored by the media, the US economy has now grown to $13.38T, exceeding the high prior to the recent financial collapse. The US consumer has returned, giving the economy a boost and the University of Michigan Consumer Sentiment Survey released this morning shows she is still felling ebullient.
In Europe this morning, the M3 Money Supply and the Private Loan Report both came in short of expectations. The Spanish Unemployment Rate set a new record, 20.33%. On Tuesday the euro unemployment rate, currently at 10.1%, will be announced. Late next week the US Non Farm Payroll and the new unemployment rate, anticipated to be 9.5% will
be announced.
Across the English Channel, the economic news this week has been morbid. The quarterly preliminary GDP was a negative 0.5%, a reduction from the anticipated positive 0.5%. With the US number a positive 3.2%, the behavior of the GBPUSD pair suggests there may be some late arriving bulls trading the price action.
Another concern in Britain is the consumer fate in the government austerity program. This morning the report on British consumer confidence does not look encouraging. As the telegraph.co.uk said: "The most closely-watched barometer of consumer confidence revealed an
"astonishing collapse" in January as the VAT rise took effect, according
to market research group GfK NOP.
The first taste of the fiscal tightening to have a widespread impact on
consumers appeared to have hit sentiment hard, researchers said, even
before the full impact of the public spending cuts is felt.
"In the 35 years since the index began, confidence has only slumped this
much on six occasions, the last being in the midst of the 1992
recession," said Nick Moon, managing director at GfK NOP Social
Research."
Many analysts have been wringing their hands, fearful the high level of inflation in the UK will cause the Bank of England to increase the bank rate. Barring a complete reversal of the poor data from Britain, this seems highly unlikely, and to the extent traders have embraced the pound the premise for their trade is faulty.
Does the Mid-East unrest enter into the relative currency values? Once started, the rebellion against autocratic regimes spreads like an airborne disease. Tunisia, Egypt, Jordon, and Albania are all clamoring for change. Who is next? Where will the scared Mid East oil and other money seek for a safe haven?
Though we are reluctant to initiate a new trade on Friday, it looks like the pound is making a rounded top. Have been repulsed from the 1.60 handles several times it seems to be rolling over. Next week we will be following closely, and looking for a spot to initiate a short GBP/USD.
Author: Ralph Shell - ForexRazor Analyst - Graduated from a small Ohio liberal arts college. Graduate studies in economics and history at Duke University. Ten years experience trading cash commodities in domestic and export markets. Former commodity analyst with Merrill Lynch in Chicago. Member of and floor trader at the Chicago Board of Trade for 18 years.