FX Market Overview

Tension is increasing between China and America after a stark warning from Beijing to US President Obama over the planned visit by the Dalai Lama. Beijing labelled the spiritual leader of Tibet a “troublemaker bent on inciting world hatred of China for its control of his mountainous homeland”.
The National Institute of Economic and Social Research (otherwise known by the racy acronym of NIESR), has raised doubts over the UK government promise to cut the national debt. NIESR say that even with tax rises and spending cuts, the Chancellor has no chance of meeting his target of halving the budget deficit. This reinforces Bank of England Governor Mervyn King’s view that UK families are in for a drop in their living standards over the next 2-years.

Consumer confidence in the UK rose to 73 from 69 in December according to Nationwide. However of concern was the biggest monthly drop in consumer spending for a year. With consumers expected to tighten their belts, the VAT increase and looming tax rises, this doesn’t bode well for the UK recovery.

UK January purchasing managers index (PMI) released this morning fell to 54.5 against an expectation of 56.5. This was the weakest since August 2009, with new business adversely affected by the snowy weather.

The only figure of note yesterday was US December pending home sales which increased in line with expectations to +1.0%. An article in the NY Times today has highlighted the increase in mortgage defaults due to an estimated 4.5 million American homeowners falling into negative equity. US banks are reporting unprecedented numbers of lenders sending back their front door keys and walking away from their properties.
December Eurozone retail sales are due out soon and are forecast to show a marked improvement to +0.4% from -1.2% in November.
This afternoon we get a valuable prelude to Friday’s very important January US nonfarm payrolls employment number when the January US ADP private employment number is released at 15:00pm.
The week starts hotting up from tomorrow with Bank of England (BoE) and European Central Bank interest rate announcements due. Both central banks will leave interest rates on hold at 0.50% and 1.00% respectively. The BoE Monetary Policy Committee (MPC) is likely to have a split vote on whether to extend the £200bn quantitative easing program. I feel there is a very good chance the MPC will pause their program, but the risk is for an extension of more than £200bn given the disappointing Q4 GDP released last week. Any extension in the QE program will see the pound sold lower, so beware.
A Dunfermline dog owner was first alerted to his hound Oscar's golf-ball eating habits after hearing a rattling noise coming from his stomach. Later a vet found 13 balls in his stomach. Oscar's owner said: ''He finds golf balls like truffles.'' A decent golf ball costs a few quid but give me a truffling hound any day