British Pound: Watch Out for More Housing Market Problems (page 1 of 2)

DailyFX Fundamentals 04-02-08

By Kathy Lien, Chief Strategist of DailyFX.com

Fears of a Recession Drives Renewed Dollar Weakness

The US dollar has resumed its slide as traders give in to the Fed's cautiousness. With Wall Street and Main Street both feeling the pain of slower growth and a depressed housing market, Bernanke warned that there could be a contraction in the US economy in the first half of the year. Although the Fed Chairman stopped short of admitting that the US economy is already recession most Americans are already acting like it. The NY Times for example has a story today about making the most out of your microwave. Interestingly enough, according to Fed Fund futures, expectations for a 25bp rate cut at the end of the month has increased to 90 percent. This is partially due to the rebound in the ADP employment report, which is signaling a stronger non-farm payrolls number for Friday. We are skeptical of the accuracy of this report given the fact that ADP has overestimated private sector payrolls growth for the last 6 months by an average of 72k jobs. Unless we see an improvement in the employment component of service sector ISM tomorrow, we continue to believe that the pace of job growth will worsen in the coming months. Challenger Gray and Christmas reported a 9.4 percent increase in layoffs last month compared to a year ago. This is in line with the recent layoffs that have been announced by Wall Street banks. On inflation, Bernanke said that even though it is a concern, inflation should moderate, which means that for the time being boosting growth is their top priority. Looking ahead, non-farm payrolls will be critical in determining how many more rate cuts we will see from the Federal Reserve. In the beginning of the year, the majority of the market believed that the central bank would stop cutting interest rates at 2.00 percent. Now that we are 25bp away from that level, figuring out how much further the Federal Reserve could ease interest rates should be the market's main focus.

British Pound: Watch Out for More Housing Market Problems

Last week, we indicate that the British pound could break 2.0 if disaster hits UK mortgage lenders. The currency is trading below 2.0 against the dollar, but thankfully there has been no disaster. However, trouble is still brewing for mortgage lenders or banks that have mortgage lending divisions and things are only expected to get worse. First Direct, which is apart of HSBC announced today that they will be withdrawing all of the mortgages to any homeowners who are not existing customers. Standard & Poor's is also reporting that Lehman Brother's has stopped writing mortgages to 2 of their UK units. Halifax, the UK's biggest mortgage lender is expected to follow suit within days. Being forced to turn away business because you have too many customers should be perceived as a good thing, but unfortunately in the world of mortgage lending in UK, the only reason why First Direct and Halifax are being flooded with new applications is because other lenders like Nationwide gave taken measures to increase the interest rate on loans or withdraw their mortgage lending products completely. If everyone stops providing new mortgages, it could cause the entire UK housing market to freeze up. Meanwhile, this morning's UK economic data was mixed with construction sector PMI contracting for the first time in six years and net consumer credit hitting a five year high. Service sector PMI is due for release tomorrow and unlike the manufacturing sector, we expect activity in the service sector to slow.

Euro Recovers After Bernanke Comments

It has been a volatile day for the EUR/USD.