Euro: Unable to Break 1.49 (page 2 of 2)

British Pound Falls Ahead of Next Week's Bank of England Rate Decision

The British pound was the worse performing currency today, having fallen over 1 percent against the US dollar and Japanese Yen. The pace of growth in the manufacturing sector slowed in the month of January which is part of the reason why the pound weakened but the other reason is because the Bank of England will be announcing an interest rate decision next week and the market expects them to lower rates by 25bp. Next to the US Federal Reserve, they are expected to be the central bank that lowers interest rates most aggressively. The economy has been on a downward spiral, led by a rapid deterioration in the housing market. In addition to the BoE decision, we are also expecting construction sector PMI, service sector PMI and industrial production. We expect most of these numbers to be pound bearish, taking the currency pair back down to 1.95.

Australia, New Zealand and Canada Look Forward to Busy Data Week

Despite a sharp sell-off in commodity prices, the Australian and New Zealand dollars extended their gains while the Canadian dollar recovered from Thursday's losses. Economic data was mixed with a contraction in manufacturing activity in Australia offset by a sharp rise in the commodity price index. Canada also reported a jump in industrial product prices but slower growth in raw material prices. The Commodity Currencies will be in play next week with the Reserve Bank of Australia announcing an interest rate decision, New Zealand and Canada reporting employment figures and Canada releasing IVEY PMI. A strong labor market and rising inflationary pressures is expected to push the RBA to raise interest rates to 7 percent. If they raise rates, they would be the last ones standing.

Correlation between Carry Trades and Equities Continue to Breakdown

Throughout this past week, we have talked about how we expect the correlation between carry trades and equities to break. We saw countless examples of this including today when the Dow rallied 92 points and carry trade currencies such as EUR/JPY and GBP/JPY actually weakened. Traders are hesitant to take on risk even though they are buying stocks. Volatility remains high which makes it difficult for carry trades to rally. We expect this trend to continue amidst the lack of market moving numbers out of Japan next week.