All eyes on Sterling as BOE minutes published at 9:30

Tom Tong25/Jan/2012Currency Updates

GBP

Today we see the Bank of England minutes and the UK fourth quarter GDP figure which is expected to post a negative figure and indicate the start of a return to a recession for the UK economy.

Investors have been very cautious in the lead up to this, as weak data could also lead to further QE and significant market movements not favourable for GBP traders. Sir Mervyn King last night gave warning on the world economy and more than suggested that the UK should be due for another round of QE.

Although sterling fell to a four week low yesterday, it failed to push on as this investor cautiousness and view of economic weakness restricted Sterling appreciation.

Adam Posen, the B of E policymaker said on Monday that further QE may be needed despite a slightly improved economic environment and this had led to further speculation of further asset purchases next month. This view was echoed by Mervyn King at a speech in Brighton.

EUR

Yesterday, we saw the US stocks open lower and UK and French stock indexes close lower as Eurozone ministers continue to discuss and put further pressure on Greece’s private bondholders to accept less than the 4% on interest rates on their loans which they initially offered. If a deal is not reached this week then Greece will not be able to make its loan repayments in March through failing to receive the bailout funds needed.

In the currency markets the Euro has appreciated against sterling and is at the strongest level for nearly 4 weeks. This is mostly related to the markets watching and waiting to see the B of E minutes and Q4 GDP figure. The market positioning on the Euro is currently very short and although we may see short-term strength, further movement could be quashed as the decision over Greece leads to market stress as the week goes on without an agreement. The IMF also cut its growth forecasts to 3.3% for the global economy, down 4% from forecasts a few months ago.

USD

Today sees the end to the Feds two-day policy meeting and expectations are for further prolonged low interest rates which will highlight the dollar’s weakness despite sentiment recently improving. Downward pressure on the dollar may continue as the troubles in Europe and in particular Greece continue to be a concern for the U.S.

Obama spoke last night and focussed his efforts mainly on jobs and taxes as the two issues he is looking to tackle for the upcoming presidential year. He proposed ideas that would see it easier for homeowners in the U.S. to get mortgage relief as well as a minimum 30% rate on those earning over one million dollars and removal of their tax deductions. Although many don’t agree with much Obama’s economic policies there is an argument that he deserves another term.

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Written by Tom Tong

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