Sterling Hit By Northern Rock Crisis by Yan Xu

The sterling fell sharply after the Bank of England provide an unspecified amount of financial support to UK¡¯s fourth largest home mortgage lender, Northern Rock, which suffered losses from recent rising lending rates sparked by US subprime crunch. This unusual move reignited worries that credit market problems may hit global economy. The sterling dropped to a 10-day low at 2.0062 versus the dollar.

The dollar was almost flat against the euro and yen on Friday though a soft US retail sales report reinforced speculations on a 50 basis point Fed rate cut next week. US retail sales rose 0.3% in August, below the estimate of 0.4%. Excluding autos, core retail sales dropped 0.4%, worse than the expectation of a 0.2% growth. US import prices declined 0.3% due to lower oil prices in August, while export prices rose 0.2% as expected. Current account deficit came out at 190.79 billion as expected in the second quarter. Industrial production rose 0.2% in August, below the estimate of 0.3%. University of Michigan consumer sentiment index was almost unchanged from previous month at 83.8. Business inventories were up 0.5% in July, beating the estimate of 0.3% and 0.4% a month earlier.

Earlier in US session today, US Treasury Secretary Henry Paulson said in CNBC interview today that credit markets have had some modest improvement. He reiterated that a stronger dollar is in US interest, giving the dollar a knee-jerk boost.

Also worth noting is that ECB Chairman Trichet today made some comments on global economy. He stated that inflation risk in the region remains to the upside, setting stage for a rate rise later in the year. He also said Japanese economy is on recovery path and foreign exchange rate should reflect this, calling for a stronger yen.

EURUSD will face interim resistance at 1.39, followed by 1.3930 and 1.3950. Additional ceilings will emerge at 1.3980, backed by 1.40. Support starts at 1.3850, backed by 1.3830, 1.38 and 1.3770. Subsequent floors are eyed at 1.3750.

GBPUSD encounters interim resistance at 2.01, backed by 2.0130 and 2.0160. Subsequent ceilings will emerge at 2.02, followed by 2.0220 and 2.0250. On the downside, support begins at 2.0060, followed by 2.0030 and 2. Additional floors are eyed at 1.9980, backed by 1.9950 and 1.99.

USDJPY encounters interim resistance at 115.50, backed by 115.80 and 116. Subsequent ceilings will emerge at 116.30, followed by 116.50 and 116.80. On the downside, support begins at 115 and 114.80, followed by 114.50. Additional floors are eyed at 114.30, backed by 114 and 113.70.