Thomas Stolper's Goldman FX team, who a little over a week ago put on a tactical target of 1.37 on the EURUSD, refuses to take profits on the EURUSD, and instead has extended the target from 1.37 to 1.40 (with a 1.33 stop). Since this is the first time we have seen the firm continue selling into the close, we wonder just how big the pain for the prop side of GS is if it must be hoping to cut its losses on a reversal. With the pair trading well north of 1.37 Goldman may be forced to keep pushing the target ever higher on Asia's ongoing rescue of Europe.
From Goldman Sachs' Thomas Stolper
Mixed macro data and mixed price action across cyclical assets was the flavour of the last 24 hours.
On the macro front good news on the substantially oversubscribed EFSF bond and US consumer confidence contrasted with weaker-than-expected business sentiment in the Richmond Fed survey and, in particular, an unexpectedly weak UK GDP. Instead of growing +0.5% qoq, as consensus thought, the UK economy shrank by -0.5% in the final quarter of 2010. Typically the first take on UK GDP is subject to substantial revisions, but it appears weather related effects in the service and construction sector are to blame, as well as a snow-disrupted holiday shopping season. Fiscal tightening may have started to have an impact as well.
In two important speeches yesterday, Bank of England Governor Mervyn King signalled continued accommodation in monetary policy in light of weak growth and an expected fall in inflation. In his State of the Union address President Obama proposed a 5-year spending freeze, with little immediate impact on the debt trajectory. The proposal likely foreshadows as debate on spending caps later this year.
In terms of price action, the mixed data coincided with a continued notable drop in oil prices, while industrial metals remained under pressure as well. EM currencies were generally slightly weaker, whereas most major currencies drifted stronger against the Dollar. EUR/USD hit the 1.37 target in tactical long recommendation and we extent the target to 1.40 with a new stop on a one-day close below 1.33.
Appropriately the biggest moves could be observed in Sterling crosses as they reflected the weakness in UK activity data. Interestingly the sharp Sterling move coincided with a notable rally in the CHF frank, which suggests positioning related activity as we discuss below.