Pound, Euro Drop As Global Recession Fears Spur Risk Aversion. Yen Rises To Highest Level Since 1995

Daily Forex Fundamentals | Written by DailyFX | Oct 24 08 10:27 GMT |

Talking Points Japanese Yen: Rises To Highest Level Since 1995 Pound: GDP Contracts For First Time Since 1992 Euro: PMI Falls At Record Pace US Dollar: Risk Aversion To Drive Dollar Sentiment Pound, Euro Drop As Global Recession Fears Spur Risk Aversion. Yen Rises to Highest Level Since 1995 The Pound precipitously dropped throughout the overnight sessions sparked by statements from BoE member Andrew Sentance that the risk of a severe recession has increased. The remarks would foreshadow the U.K. GDP report which showed a 0.5% decline in growth which added to the bearish sterling sentiment and has the Pound trading below 1.5300 and sinking. That news combined with a record low Euro-Zone PMI reading and a near 10% drop in the Nikkei pushed global recession fears to elevated levels. Rising concerns would spark a flight to safety that would see the Yen rise to the highest level since 1995 and the Euro set fresh two year lows. Growth in the U.K. fell to its lowest level since 1992 and after 2Q 0.0% reading the case could be made that a technical recession has already began. The outlook is not much better as the slowdown is expected to deepen in the fourth quarter of 2008 and first of 2009 as the effects of the past month's frozen credit markets are yet to be realized. A 6.1% drop in mining demonstrates the dour outlook for global growth which has driven down commodity prices. Additionally, the index of services fell 0.3%, the sector accounts for 75% of GDP and with the current crisis of confidence we should continue to see weakness in this sector. The BoE is now expected to accelerate the pace of their rate cuts and another coordinated easing could be ahead which could be realized at next week's FOMC rate decision. The picture in the Euro-Zone was just as dour as the October's flash PMI composite reading fell to a record low of 44.6 from 46.9. The manufacturing component dropped to 41.3 from 45.0, while services fell to 46.9 from 48.4. A drop in new orders signal that weakness will continue as the economic region continues to see growth slow. The Euro would fall below 1.25 for the first time in two years as expectations that the central bank will now need to continue easing interest rates to avoid a deeper recession. Indeed, German import prices falling 1.0% will reduce the price stability fears and open the door for a rate reduction. Therefore, we should continue to see weakness in the single currency with the possibility of the EURUSD reaching parity becoming more likely by the minute as interest rate expectations decline. . The Yen continues to rise as the carry trade gets decimated by the prevailing risk aversion that has gripped markets as the outlook for the global economy continues to dim. The USDJPY would fall to 91.00 -its lowest level since 1995- before finding support. The momentum from yesterday's rebound in U.S. equities failed to carry over to Asian and European markets for the first time since the crisis reached its current heightened levels. The EURJPY which is a good gauge of the world economy fell 135.57 to 113.78 in overnight trading signaling that a serious global downturn may be imminent. The growth story is clearly a worldwide issue and with Dow futures trading sharply below fair value we could see continued Yen strength. The U.S. equity markets will most likely follow the lead of the Asian and Europeans indexes and the massive flight to safety should remain a driving force for the dollar today. Now that is clear that the BoE and ECB will need to play catch up with the Fed in easing monetary policy and the pace at which the cuts will come will only add to the current bullish dollar sentiment. Although, the FOMC is expected to lower its benchmark rate to 1%, we don't expect them to keep them at those levels for an extended period of time. After watching former Fed Chairman Alan Greenspan testify in front of Congress yesterday, Chairman Ben Bernanke will most likely not make the same mistake as his predecessor and may look to raise rates as soon as the economy stabilizes. Therefore, we may see the dollar momentum continue for an extended period of time. The existing home sales report to cross the wires today is expected to show a gain in purchase of 0.8% which may add to the dollar bullish story. However, OPEC announcing that they will be cutting production by 1.5 million barrels could end the greenback's current momentum and lead to a short-term retrace at these oversold levels. DailyFX Disclaimer Investment in the currency exchange is highly speculative and should only be done with risk capital. Prices rise and fall and past performance is no assurance of future performance. This website is an information site only. Accordingly we make no warranties or guarantees in respect of the content. 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