Euro Hits 20 Month Low, British Pound Closes in on 5 Yr Low

October 21, 2008

Here are some comments about the Euro and British pound that I wrote for my Daily Piece at GFT:

Expect the EUR/USD to break 1.30 and USD/JPY to break 100.

EURO FALLS TO THE LOWEST LEVEL SINCE FEB 2007

The Euro dropped to the lowest level against the US dollar since February 2007. The combination of weaker oil prices and dollar repatriation has weighed heavily on the currency pair. It is becoming increasingly apparent that the Eurozone financial sector is in just as bad shape as the US. According to the Financial Times’ economic forecasts for all European countries, neither Germany, France, Spain or Italy are expected to grow by more than 0.5 percent in 2009. Perhaps they are lucky not to suffer from the negative 2009 GDP growth that is forecasted for the UK. Tough times are ahead for the Eurozone which should lead to a test of the 1.30 level in the EUR/USD. There was no meaningful Eurozone data released over the past 24 hours and nothing of consequence is expected on Wednesday. Switzerland on the other hand reported a stable trade balance as exports and imports decline.

RECESSIONARY COMMENTS FROM KING DRIVES GBP TOWARDS 5 YR LOW

The British pound fell to the lowest level against the US dollar since November 2003 as Bank of England Governor King suggests that the UK is in a recession. The prospect of a prolonged slowdown in consumer demand and further housing market weakness should thrust the country into its first recession in 16 years.

He also added that a larger, faster trade and FX adjustment may be necessary. With such a dour economic outlook, the UK needs a weak currency to attract whatever export demand that may still be remaining. Prime Minister Gordon Brown also said this morning that more borrowing will be needed. Public finances are in horrible shape and is likely to get worse with the expected drop in tax revenue. The Bank of England minutes are due for release on Wednesday. The data will shed light on how close the UK is to another interest rate cut.

DOLLAR RALLY COULD BE SHORT LIVED

Posted in Bank of England, British Pound, ECB, Fed Rate Cut, US Dollar, euro, forex blog