Brave New World

FX Daily Update 19/08/2009

The European morning session has traded in a tight range as traders are waiting for further cues about the sustainability of the Asia-led economic recovery. Yesterday’s higher than expected UK CPI figures and European investor sentiment data alleviated the flight to safety earlier in the week. The most significant move in the FX markets this morning came from sterling, which dropped against the USD following Bank of England minutes showing that three MPC members, including Governor Mervyn King, had been voted down over proposing an even bigger boost to Quantitative Easing than was finally agreed. The overall tone of the minutes was also dovish, with the BoE stating that not enogh stimuli could lead to inflation remaining below the 2% target level.  It said that although the overall level of risk had receded the depth of recession increased the likeliness of slack in the economy. The more dovish than expected sentiment from the MPC led to the GBP slipping below its 50 day moving average (1.6464) to retrace yesterday’s advance against the USD. However, the decline stalled at 1.6375, holding well above the weekly low of 1.6275. Sterling had started its decline from just under the 1.66 handle in anticipation of the release of the minutes.

In the Eurozone a lack of risk appetite in the European trading day led EURUSD to slip from a high of 1.4170 to the 1.4100 level, with German producer prices declining 7.8% versus and expected fall of 6.5%. This is the largest fall in prices in 60 years. EURUSD has remained above the 1.4092 50 day moving average- an imporant support level that, once breached, may lead to a more bearish move in the currency pair.

The USD, which has firmly reestablished its firm inverse relationship with risk sentiment, has been trading strongly on the back of a quiet but cautious trading day.