British Pound Takes Another Beating (page 1 of 2)

DailyFX Fundamentals 12-20-07

By Kathy Lien, Chief Strategist of DailyFX.com

Canadian Dollar: Time Magazine's Newsmaker of the Year

Many people may realize that this week, Time Magazine announced their pick for Person of the Year. Yet few probably realize that the Canadian edition of the magazine also announced their Newsmaker of the Year. In the past, this honor has been bestowed on the Canadian Prime Minister, Judges and other influential Canadians who have had the most impact on the news, either positively or negatively. This year, that honor has been bestowed on the Canadian dollar. Even though being named the Canadian edition's Newsmaker of the Year is not as high profile as the Person of the Year, it is still a testament to how popular currencies have become. At certain points this year, the high flying Canadian dollar became as volatile as the British Pound. When the Canadian dollar hit an all time high on November 7, Canadians were finally able say that their economy "was smoking its U.S. counterpart." Even though it bottomed on that very same day, the latest rally resurrects thoughts on whether we will see 90 cents again. Wholesale sales for the month of October were strong which indicates that retail sales for the same month could also surprise to the upside. Australian will be releasing their leading indicators report. There is no data from New Zealand after their Q3 GDP numbers this afternoon. Quarterly growth slowed to 0.5 percent but that was offset by an upward revision to the prior month's report. Annualized GDP growth increased slightly from 3.2 to 3.3 percent.

British Pound Takes Another Beating

Since Monday, the British pound has fallen over 400 pips against the US dollar, making the GBP/USD one of the foreign exchange market's most active currency pairs. Weaker CPI numbers were followed by dovish BoE minutes and now mixed economic reports have given pound traders more reason to sell the sterling. Annualized GDP for the third quarter was revised from 3.2 to 3.3 percent and mortgage approvals rebounded, but that was offset by the news that the current account deficit hit a record high while money supply growth slowed. Even though Prime Minister Gordon Brown insisted yesterday that the UK economy is fundamentally strong, price action in the markets indicate that traders do not believe him. The interest rate cut from the Bank of England earlier this month was not only the central bank's first but it also marked the beginning of a new monetary cycle. Many traders believed that the last rate cut would be the one and only move from the central bank for a very long time but incoming data is beginning to suggest otherwise. Tomorrow we have UK retail sales. If that fails to inject new life in the British pound, we could be headed for 1.96.

Weaker Economic Data Fails to Halt the Dollar's Rise

Trading in the foreign exchange market continues to be very quiet. We had relatively weak US economic data released this morning, but that failed to have a meaningful impact on the US dollar. Third quarter GDP was unchanged at 4.9 percent even though the price indices were revised higher. The big surprise came in the Philly Fed index which dropped to -5.7, the weakest level in 4 years. Given the deterioration in both the Philly Fed and Empire State manufacturing indices, we can see that the weak dollar has not come to US economy's rescue. The manufacturing sector is not benefitting from increased demand and instead tougher lending practices and the prospect of slower growth next year has caused many manufacturers to believe that more difficult times are ahead.