FX Market Overview

Happy Anzac day to our readers in the southern hemisphere! Nearer to home in the Northern hemisphere there is less to cheer about with news dominated by events in the Eurozone; a deal in the Greek debt swap seemingly not quite as imminent as first thought, EU finance ministers rejecting the Private Sector Involvement (PSI) plan, the International Monetary Fund (IMF) warning that the world economy is “deeply in the danger zone” because of risks from the Eurozone. Happy days indeed. That said, the data was not however universally negative as the Euro received a boost yesterday when manufacturing activity in the Eurozone was shown to have improved by more than expected in January, gaining at the fastest pace since August 2011. The preliminary Purchasing Managers Index (PMI) rose by 1.8% to 48.7 in January from 46.9 in December although positive was crucially still below the 50.0 level which indicates that manufacturing is still contracting on the whole. The improvement was largely due to improved conditions in Germany as the rest of the region is still going through a steep downturn.
Whilst Britain’s public debt surpassed £1 trillion yesterday and the growth forecast for the UK was trimmed to 0.6% for 2012 by the IMF, there was a fillip for the Chancellor as overall borrowing in December came in lower than expected at £13.7bn in December from £15.9bn a year earlier. This has ensured that UK Chancellor Mr Osborne is still on target to meet his objective of bringing borrowing down by £10bn this financial year. This news helped boost the Pound in early trading.
Australian Quarter 4 Consumer Price Inflation (CPI) came in a little weaker than expected at 3.1% year on year, raising expectations of an interest rate cut from the Reserve Bank of Australia (RBA). Most economists had expected a rise of 0.2% and the fact that inflation pressures appear to be stabalising and growth has been relatively sluggish will only increase talk of a further loosening of policy possibly as soon as February. The Australian Dollar actually strengthened on this news becuase inflation is still within the RBA's long term underlying inflation target band.
German IFO data is the first release to demand our attention this morning and that will be released at 9am GMT with the market expecting a figure of around 107.6 which would be a slight improvement on last month. Whilst this figure is normally closely watched, this month it may well lose some of its lustre given the events in Greece taking centre stage unless the number deviates significantly from expectation. That said if it does report a positive figure that will be the third consecutive month that the confidence guage has increased it may provide enough confidence to push the Euro stronger on short term profit taking.
Wednesday also brings the first glimpse of tier 1 macro data in the form of the preliminary release of fourth Quarter GDP from the UK at 9.30am. Finally we will get to see if we are on the brink of a double dip and most economists are predicting that growth will be anaemic at best. The market is now expecting figure of -0.1% and anything less could send the Pound tumbling. At the same time we will have the first chance to see the minutes of the recent Bank of England meeting which will give us clues as to whether or not further quantitative easing will be on the agenda in the near future. Monetary Policy Committee member Adam Posen certainly thinks so and it will be interesting to see if any other members of the committee agree with him. On that note overnight Mervyn King, the Governor of the Bank of England, hinted that further quantitative easing could be on the cards. He stated that “if necessary there is scope for further asset purchases, to prevent inflation falling below the 2% target”. Expect the Pound to weaken if this is confirmed in the minutes.
Finally this evening the US Federal Open Market Committee (FOMC) will almost certainly leave interest rates at their historically low levels in the United States at 5.30pm GMT. We'll also await an interest rate decision by the Reserve Bank of New Zealand (RBNZ) at 8pm GMT which is widely expected to see rates left on hold at 2.50%, a situation that may remain until the second half of 2012.