Deflation and the Sterling

Jobless claims in the UK due out today are anticipated to rise for the ninth consecutive month in October, adding to evidence that the combination of a slowing global economy, sharp declines in domestic consumption, and the continuous collapse of the UK housing sector are bound to make the UK economic contraction extend for a lengthy amount of time.

Indeed, the jobless claims change is anticipated to rise by 40K, the largest single-month gain since 1992, and while this could impact the British pound the announcement of the Bank of England's Quarterly Inflation Report may be more important.

Given the Bank of England's latest policy statement following their aggressive 150 basis point rate cut it appears the MPC are now more concerned about the potential for deflation, and if the Inflation Report confirms this outlook, the news could trigger a large British pound sell-off.

Yesterday sterling came under severe pressure as EUR/GBP pushed for record highs above .8200. USD strength and comments from PM Brown on unfunded UK stimulus plan pushed the pound below 1.55 and opens up the possibility of testing year lows at 1.5250 and the key downside target of 1.5000. Overall the GDP/USD traded with a low of 1.5354 and a high of 1.5702 before closing the day at 1.5380 in the New York session.

The Euro fell heavily against the dollar after Oil broke below $60 a barrel and US stocks slumped. Support at 1.27 gave way and the Euro slumped to the next key level at 1.25. The German ZEW economic survey beat expectations at -53.5 vs. -62 expected. Weak stocks lead to pressure via heavy EUR/JPY selling. Overall the EUR/USD traded with a low of 1.2509 and a high of 1.2799 before closing the day at 1.2540 in the New York session. 

Japan October Consumer Confidence eroded to 29.4 NSA, an all-time low, after edging up to 31.4 in September from 30.1 the prior month. It reflects consumer anxiety in the face of the slowdown in the Japanese economy, aggravated by the weakness in the stock market. The confidence index had temporarily firmed m/m in September on some consumer relief from the easing in oil prices. 

The Aussie dollar was weighed down by multiple negative factors. Business confidence fell by the most in its 19 year history to -29. Commodities fell heavily throughout the day and risk aversion also spiked on heavy stock falls. GBP/AUS traded with a low of 2.3143 and a high of 2.3770.