Markets await BOE inflation figures as fiscal cliff talks drag on

Tom Tong18/Dec/2012Currency Updates

Largely the theme for this week is uncertainty. Being the run up week to Christmas, we will see that fewer traders will be present in the market, leading to expectations of less liquidity, especially for exotics. With this being the case the main pitch to clients should be to ensure that they are aware of the predicted uncertainty, offering two sides to the argument

GBP

News on Sterling has been looking towards today, with the Bank of England publishing: core and standard CPI data, with the consensus being 0.2% MoM. It is expected that YoY inflation will hold at 2.7%, with speculators expecting a fall in the value of sterling to the Euro, based on the increasing price pressures likely from Mark Carney’s output based approach to monetary policy being a main feature in the BoE’s publications. Sterling did, however hit a 2 and a half month high vs the dollar yesterday, this has been attributed mainly to demand from middle eastern investors looking to hedge. There are also thoughts that sterling could continue to strengthen against the dollar if US policy makers can’t head off tax rises and spending cuts for the beginning of 2013. However the view to the publishing of the BoE minutes tomorrow will no doubt stir some more uncertainty as there may be more talk of quantitative easing.

USD

Yesterday the Empire state manufacturing index showed a value of (-8.1) a large difference from the previous consensus of (-1.00). This is likely due to the aftermath of Hurricane Sandy still impacting upon manufacturing in New York. This would usually be followed by poor growth for USD. Yesterday congress went on winter break, until the new congress is sworn in. This poses as a further obstacle to a deal being achieved on the fiscal cliff before the end of the year. Today we will also see the statement for the US current account for Q3, with the consensus being a small reduction in the deficit, possibly strengthening the USD. It is generally deemed that the USD will strengthen over Christmas.

EUR

Draghi’s speech went ahead yesterday, and the summary was a negative one. Draghi stated that “The economic weakness in the euro area is expected to extend into next year.” Draghi justified this with the thought that “Long term refinancing operations” had failed to provide liquidity to anything other than falling banks. His speech is held as causal to the drop in EUR/USD from 1.308 to 1.295, when selling pressure subsided yesterday. The ECB held the key reference rate at 0.75%

In addition, Spain are auctioning treasury bills today, both 6 month and 3 month, further financing Spanish government debt. With the IFO report due tomorrow, it is likely that the figure will remain under 100, showing a consensus for further contraction in industry

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Written by Tom Tong

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