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"Do-or-Die" Hours for Pound, Aussie

Boris Schlossberg

After recovering earlier losses against the US dollar, both the British pound and Australian dollar now face crucial economic data releases that are likely to decide whether near-term bottoms or continued losses are ahead.

Monday’s North American trading session was especially quiet, with many currencies trapped in very tight consolidative ranges. News flow has dried up to a trickle and the economic calendar is barren. Both the British pound (GBP) and Australian dollar (AUD), which were noticeably weaker in the Asian and European sessions, have rebounded off their lows versus the US dollar.

The Aussie now faces a slew of data in early-Asian trading starting later today, with retail sales and the current account balance due out first, followed by the Reserve Bank of Australia (RBA) statement at 03:30 GMT. Almost no one in the market expects the RBA to ease from the current 3.00% level. Australian monetary officials have gone out of their way to signal to the market that they are relatively satisfied with the economic conditions and that they believe that the stimulus from the prior rate cuts has yet to fully make its way through the system.

However, a weak showing on the retail front could quickly erase the RBA's complacent attitude. If retail sales contract for the third month in a row, such a trend would have ominous implications for consumer demand and overall growth down under.

There is no doubt that growth in Australia is slowing, as investment in the mining sector eases and the housing boom loses steam, as evidenced by today's disappointing figures. The key question is just how bad is the slowdown? If the data misses the mark, expectations for an RBA rate hike will rise significantly and shorts will begin targeting parity in the AUDUSD pair, regardless of whatever message the RBA puts out.

British Pound Faces “Last Glimmer of Hope”

Meanwhile. UK data continues to signal a deepening recession as the PMI construction report—much like last week’s PMI manufacturing report—missed its mark, printing at 46.8 versus 49.2 expected. This was the lowest reading since October 2009, destroying any expectations of a rebound in the housing sector.

Cable has also enjoyed a very nice rebound as it quickly recovered from day's lows near the 1.5000 mark. Part of the gain was due to some bargain hunting, but the pair received a fair amount of strength from EURGBP flows. That unit is once again enjoying a bit of a safe-harbor bid amidst the growing chaos in Italy that appears to have no resolution in sight.

Still, despite the bounce, tomorrow's UK PMI services report looms even larger than usual, as it remains the last glimmer of hope for the bulls. Services represent more than 70% of UK economic activity, and the forecast is for a reading of 51.5. However, if the data misses—or worse, dips below the 50 boom/bust line—then sterling is very likely to give up the 1.5000 level for good.

The pound and Aussie will now face a major moment of truth over the next 12 hours: If data holds up, they may have put in near-term bottoms…for the time being, at least. If, however, the economic calendar produces even more disappointment, fresh lows could be in the offing.

By Boris Schlossberg of BK Asset Management

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