Pound Falls As Brown Announces Plan To Buy Toxic Assets, EC Cuts Growth Forecast

Talking Points

• Japanese Yen: Finds Support At 90.40
• Pound: BoE To Buy Toxic Assets
• Euro: E.C. Forecast Contraction in 2009
• US Dollar: Markets Closed On MLK Holiday

Pound Falls As Brown Announces Plan To Buy Toxic Assets, EC Cuts Growth Forecast

The Pound dropped over 200 bps as the British government announced that it would empower the BoE to buy toxic assets in an effort to promote lending. After a reaching as high as 1.4897 the Sterling would fall back to 1.4627 before finding support. The January Rightmove housing report showing a 1.9% drop in house prices started the pound's sell off as further deterioration in the sector continues to add strain to the banking system.

U.K. Prime Minister Gordon Brown announced today that the government would increase its role in the financial system by using the BoE's balance sheet to buy at least £100 billion in troubled assets. The Prime Minister stated that this was not a bailout of U.K. banks but an effort to improve lending to consumer and businesses. Despite the initial reaction to the plan, it may prove supportive for the Pound if markets believe that it will accelerate the economy's recovery. Meanwhile, technical factors continue to impact price action as the 50-Day SMA has proved as a formidable resistance level at 1.4907.

The European Commission forecasted that the region's economy will contract for the first time since the Euro was instituted. The E.C. is forecasting a contraction of 1.9% reversing November's prediction of 0.1% growth as tight credit markets and shrinking global demand weighs on its economies. The Euro sold off ahead of the news falling to a low of 1.3245 as investors were expecting the dour forecast. Meanwhile, construction activity in the region dropped 1.1% in November which was the lowest in eight months confirming the expected impact of tight credit markets. The Euro could start to become range bound as the ECB signaled that it will forgo further action until its March meeting, where further easing is most likely. However, a break below support at 1.300 could lead to extended losses with a possible drop to 1.2500.

The U.S. trading session will be quiet with markets closed for the MLK holiday. Therefore, a lack of event risk will leave price action at the mercy of broader economic factors. The dollar may continue to benefit from safe haven flows as markets remain weary after last week saw the Bank of America go back to the government for additional aide and Citigroup announce the end of the business model as they try to survive. We may also see some positive green back flows due to the U.S. presidential inauguration as the new administration is expected to usher in a fiscal stimulus package in excess of $750 billion. The President Elects economic advisors have already announced that the remainder of the TARP funds will be focused on promoting credit to consumer s and businesses. Although, we could see some dollar weakness on a increase in risk appetite, the medium term impact should be dollar bullish if traders believe that the economy is best positioned to emerge from the current downturn.

DailyFX

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