As expected, The UK was confirmed last week as being officially in recession. The severity of the slowdown took the market by surprise. Shrinking by 1.5% in the last quarter of 2008, the consequent sell off for the Pound was sharp. GBP/USD fell to just above 1.3500, a 23 year low, while EUR/GBP rose to 0.9470.
The USD and JPY continued to gain ground as investors searched for quality, though, by the end of the day, the Dollar had given back much of it’s gains thanks to expectations of a ‘spat’ between the US and China following Geithner’s comments about Chinese currency manipulation.
Also helping to keep the Dollar suppressed was the sharp rise in commodity prices with gold up to $900 an ounce and oil rising by almost $3 over the day.
Elsewhere, New Zealand's services industry contracted for a ninth consecutive month in Dec, with the performance of services index dropping from 48.0 to 47.3. The Kiwi remains soft ahead of RBNZ rate decision on Thursday which is expected to have another 100bps cut in the OCR from 5.00% to 4.00%.
Trading during Asian hours earlier this morning was subdued due to the Chinese New Year celebrations which continue all week. Compounding the general lack of interest was the fact that both Australia and Singapore were enjoying days off as well.
The day began with the Pound suffering once again following reports in the UK press of one of the MPC members, Blanch flower, calling for UK rates to be cut to zero or 0.25% to help stimulate the economy back into action. GBP/USD fell from near 1.3800 to 1.3550 in very illiquid trading. The pair later recovered towards 1.3650 but remains vulnerable.
EUR/USD followed suit but not by such a dramatic amount. In fact, the USD made gains across the boar more on a risk aversion move than anything else. This also saw the JPY higher but this proved to be a temporary measure as traders who were in the market were quick to take profit on these exaggerated moves.
Far East trading will likely remain quiet thanks to the Chinese holidays this week and the fact that the FOMC decision is due on Wednesday.
US Existing Home Sales at 3:00 PM (GMT) may prove to be a catalyst late into the session with expectations calling for a -2.0% contraction in December.