Pound drops significantly and a week full of event risk spurred risk aversion

Pound drops significantly and a week full of event risk spurred risk aversion

04-20-2009 14:23

Risk aversion has been boosted due to a week full of event risk, while during last night’s trading session the Pound fell over 200 pips. The employment and UK CPI data will be published in the following two days and these figures will probably prove the point of view of the Bank of England that inflation will undershoot their 2% target and that the economy will continue to slow down until the end of this year. According to the Rightmove data house prices went up for a third consecutive month by 1.8%, which added more optimism to the economy.

Government’s budget: focus on growth and solve unemployment

It is to be expected that the government’s budget, which will be revealed this Wednesday, will prove a focus on growth and should consist of actions to solve unemployment. However, Chancellor Darling will probably announce that this year the economy will decline by 3.5% and that the recent rescue plans will result in continuing tax burden. The GDP/ USD dropped below the 20-Day SMA at 1.4663 and could supply considerable support and could result in a change in sentiment.

Euro under pressure – ECB remains divided

The Euro remains ignored by traders which caused the single currency to suffer pressure, while the European Central Bank remains indecisive on non-standard actions and additional easing. The EUR/ USD dropped to 1.2952; noticeably under the 50-Day SMA at 1.3037. This week, German Zew and IFO surveys latter will clarify the situation concerning dominating sentiment and whether optimism will influence the central bank. Market participants expect an additional 25 bps rate cut and some form of quantitative easing.

OECD’s Gurria: positive signs from China and the US

During overnight trading the Dollar found support as a result of risk appetite vanishing ahead of this week’s expected considerable event risk. The economic calendar only consists of the leading indicator gauge and is expected to fall by another 0.2%, which implicates that during the next three months the economy will deteriorate. Should earnings reports continue to add optimism then stock markets could continue to gain and frustrate the Dollar. José Ángel Gurría Treviño, secretary general of the Organisation for Economic Co-operation and Development (OECD), declared that there are optimistic signals from the US and China and should markets believe in a soon recovery, risk appetite could be stable on the midterm. Still, it is likely that clear signals of a recovery will not appear until the end of this year, which could cause instable price action for the short-term.