Dollar Firm on Risk Aversion as Dow Breaks 7000

03/03/2009 11:57 am EST

Focus: FOREX

Dollar is lifted higher on another round of bad news from the finance sector. AIG posted record loss of $61.7b in Q4 and is set to restructure the bailout deal. HSBC posted 70% drop in 2008 profits and announced plan to raise $17.7b capital. Major European indices are 2%-3% down while US stocks open sharply lower with Dow breaking the 7000 psychological level. Sterling is so far the biggest loser today, as hit by worry on banking sectors.

Released in early US session, US personal spending was 0.6%more than expected in January compared to consensus estimate of 0.4%. Also, this marks the first increase in seven months. Personal income rose 0.4%, also much better than the expected -0.2% decline. Headline PCE rose 0.7% year-over-year, above consensus of 0.5%. Core PCE, though, moderated sharply from 1.7% yoy to 0.6%. ISM manufacturing index unexpectedly improved slightly from 35.6 to 35.8 in February. Construction spending dropped much more than expected by -3.3% in January though. From Canada, Q4 GDP posted sharpest decline since 1991 by annualized -3.4%. Though, it's less than expectation of -3.6%.

Released earlier, euro zone flash CPI surprisingly gained 1.2% year-over-year in February, better than consensus of +1% and +1.1% in January. However, this should not hinder the ECB from reducing interest rate at Thursday’s meeting as the general economic outlook remains sluggish. Further weakness was seen in the industrial sector. Manufacturing PMI was revised down to a record low of 33.5 in February, the ninth straight month of contraction, following an improvement to 34.4 in the previous month. Components such as employment, new orders, input and output prices also plunged to the lowest level since the index began. Among all, Germany and Spain were the weakest countries with final reading for Germany also revised down to 32.1 in February, compared with January's figure of 32.

Switzerland's SVME PMI plunged to 32.6 in February, worse than consensus of 34.5 and January's 35. This was the sixth consecutive monthly contraction and indicated the industrial sector in the nation deteriorated much faster than previously expected. In the UK, manufacturing PMI plunged to 34.7 in February from 35.8 in January. The worse-than-expected reading (consensus: 35.2) should pressure the BOE to slash interest rates further at the meeting Thursday.

GBP/USD Outlook

GBP/USD dives further to as low as 1.4032 so far in early US session. Break of 1.4093 support affirms the bearish case that corrective rebound from 1.3053 is completed at 1.4984. Intraday bias will now remain on the downside as long as 1.4363 minor resistance holds and further fall should be seen to retest 1.3503 low. On the upside, though, above 1.4363 will turn intraday outlook neutral again. Further break of 1.4660 will argue that rebound from 1.3503 is resuming for 1.5722 medium-term resistance instead.

In the bigger picture, a medium-term bottom is in place at 1.3503 after GBP/USD completed the five-wave sequence from 2.0158 (1.7445, 1.8668, 1.4557, 1.5722, 1.3503). Price actions from 1.3503 are treated as correction/consolidation in the larger down trend from 2.1161. It's uncertain whether such correction from 1.3503 is developing into sideway consolidation below 1.5722 or a stronger rebound. Nevertheless, as long as 1.3503 low holds, such consolidation is still in favor to extend further with another rise before completion. Decisive break of this support is needed to confirm down trend resumption.


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