| Daily Forex Fundamentals | Written by Forex.com | May 22 09 10:15 GMT | | |||||||||||||||||||||||||||||
| Following an early sell off cable bounced off the USD/GBP1.5760 level as sterling sentiment was lifted by comments from the OECD's Secretary General Gurria that S&P's downgrade to its UK debt outlook was inexplicable. The volatility in sterling over the past 24 hours or so describes the confusion in the market as to the extent of the bad news with respect to the UK national debt. While the outlook is indeed sour most investors do not suspect that the UK government is anywhere close to being at risk of defaulting on its debt obligations; though clearly budgetary restraint will have to be displayed by government going forward. While the budget outlook is a significant concern, this is not new news. Crushed by bad news on the UK financial system and national accounts, the pound is still about 30% weaker vs the EUR relative to its pre-Northern Rock levels and about 20% softer vs the USD. With so much bad news still in the price, it is likely that the pound will remain sensitive to good news going forward. Yesterdays' news from S&P on UK debt completely overshadowed the announcement from Spanish bank Caja Madrid that it would skip a bond interest payment due to subprime related problems at home. With Spanish unemployment at 17.7% and rising it is not surprising than the level of domestic bad debts are rising. It is possible that more bad news will emerge from Eurozone banks during the summer, a factor which would like put further downside pressure on EUR/GBP. Sterling was largely unresponsive to this morning's second estimate of Q1 GDP. The estimate remains at -1.9% q/q. The outlook for cable continues to be complicated by an unwinding of USD longs created in response to the financial crisis. It follows that many of these 'safe-haven' positions would be unwound following the softening in Libor. However, there is significant risk that this recession could bring further negative shocks meaning that USD buyers could yet return. For now, however, the USD is responding to concerns over the outlook for US fiscal policy which was intensified by comments from Boston Fed President Rosengren that the US recovery could be 'slow' and the tone is clearly bearish. Technically, while cable remains above GBP/USD1.5520 it is in an uptrend, but going forward the fundamental picture is less secure. The uptrend in EUR/USD has remained a theme during London hours and with no US data scheduled until Tuesday; this could remain the theme over the long weekend. The NZD has been the largest benefactor from the negative USD sentiment this morning. Yen gains vs the USD have been fairly modest with many investors cautious of extending yen long given the perception in some quarters that the risk of intervention by Japanese authorities may have risen this week. Upcoming Economic Data Releases (US Session). Prior, Expected
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Friday, May 22, 2009
London Session Recap
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