Currency Matters

Political agreement would not appear to be any closer in the US following President Obama’s State of the Union address last night. With the postponed fiscal cliff spending cut discussions due to re-emerge in the forthcoming weeks, markets will be hoping bipartisan agreement is easier to come by than it was in the run up to the new year deadline. Last night President Obama offered little in terms of initiatives that are likely to do much to help increase US growth, such as minimum wage increases and climate initiatives. However, when it came to deficit reduction the president was slightly more emphatic, stressing that whilst it is important; “deficit reduction alone is not an economic plan”. It would appear that the theme of political impasse is due to continue as discussions regarding spending cuts and tax hikes loom closer.

Elsewhere yesterday we saw confusion in the markets following contradictory statements released by the G7. Initially indicating that it was unconcerned with recent worries regarding the weakening Japanese Yen, the statement from the G7 seemingly appeared to accept Japans latest fiscal policy manoeuvring as a domestic issue. However this stance was contradicted soon after the initial statement was released, when a G7 official clarified the situation, expressing that the G7 was in fact concerned with Japans monetary policy and the statement had been directed at Tokyo. This led to a wide trading range yesterday for USD/JPY, as the pair bounced between 94.40 – 92.94. We may well see fluctuations in the Yen continue tomorrow as the Bank of Japan is due to release its interest rate decision and monetary policy statement in the morning.

Unsurprisingly Sterling is down against the Euro and the Dollar yet again this morning. After falling over night and during the early hours of this morning, BoE Governor Mervyn King’s speech following the Bank of England’s Quarterly Inflation Report offered no assistance in halting the decline. Despite Governor King insisting the UK economy was set to recover, his comments were shrouded in numerous caveats. Mainly these were that growth is going to take longer and be weaker than had originally hoped, and that inflation is likely to rise. Markets reacted negatively to the Governors speech, in which it was also disclosed that inflation is likely to remain above target as it is becoming increasingly difficult to bring CPI back to the targeted 2%. This lead to immediate downward spikes in both GBP/EUR and GBP/USD, as the pairs dropped as low as 1.1514 and 1.5533 respectively.

With little more economic data due to be released this afternoon, it’s more than likely we will see markets consolidate in preparation for tomorrow. GDP figures are due out across Europe tomorrow morning, with the majority of market focus being heavily placed on German and EU figures. Should these figures fall short of market expectations, this could well be a catalyst for Sterling to begin recovering some of its recent losses.

Mark Webster