Cable was also weaker on the night slipping below the 1.5100 mark as traders reacted to Parliamentary testimony of outgoing BOE Governor Mervyn King who admitted that too big to fail was still the primary problem facing UK banking while also noting that he would like to see leverage ratios reduced to 10-20 level. Such sharp reductions would cause a significant contraction in UK credit creation and FX markets reacted negatively sending pound to a low.
Today’s news will be dominated by the outcome of monetary policy meetings in the UK and the euro area. The outcome of the UK MPC meeting hangs on a knife-edge following Governor King’s decision to break ranks and call for further QE at last month’s meeting. With the economic data over the past month having been mixed to slightly weaker, and the recent Italian election stalemate highlighting the ongoing risks in the euro area, on balance, 30% of the market expect the MPC to sanction further stimulus. But it is a close call. It is not clear that enough has changed to prompt those MPC members that were opposed to further stimulus last month to change their views. However, it would be unprecedented for the Governor to be out-voted on QE two months in succession. If the MPC announces an increase (most likely £25bn), expect sterling to come under further pressure, although any positive impact on gilt yields could be short-lived.
Euro once again failed to clear the 1.3080 level and then quickly fell into 1.3030’s after the release of EZ GDP showed exports saw their biggest fall since Q1 of 2009 and comments from Bresani offered no hope of a solution to the Italian election quagmire.
In the euro area, a case could also be made for further stimulus. The ECB’s medium-term forecasts, released today, are likely to suggest protracted sub-target inflation and downside economic risks. Nevertheless, despite some calls for a further refi rate cut, Lloyds TSB expect the ECB will hold off for now. However, it is likely that the ECB will cut the refi rate in Q2 and we will be watching Draghi’s post meeting press conference closely for any hints of future policy moves.
While strong US data yesterday once again helped the USD make ground, we struggle to buy into USD positive sentiment at these levels. Eventually, when there is some prospect of a rise in US rates, strength in the US economy will provide a reason for more aggressive USD buying. But the ultra-dovish Fed stance makes it hard for us to believe that this time is now. There is still a tendency for better US data to provide support to the global economy, and consequently to reduce risk premia in the more challenged areas. Having said this, at this stage the USD is still recovering losses made on the introduction of QE3, so there may yet be some more upside
Meanwhile the Aussie continued to display relative strength rising to a high of 1.0300 in late Asian trade after Australian GDP came in line with projections. Australian Q4 GDP printed at 0.6% on a q/q basis and recorded a very respectable gains of 3.1% on a year over year basis. The data showed that despite the recent slowdown in activity, Australian economy remains one of the better performers in the G-20 universe.
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