If last week's slew of poor UK economic data releases (retail sales, jobless claims and PSNCR) wasn't sufficient evidence of the fact that the UK economy remains fragile, comments from BoE officials this morning drove home the point.  Cable tumbled on the collection of remarks dropping from around 1.5540 back towards 1.5400.  The gist of the comments suggests that more QE may yet be considered. There is nothing in the comments to suggest that the Bank is considering bringing forward any rate hike.  Most optimistic of the comments were Bean's remarks that the recovery would 'gradually pick steam' this year, but this was countered by his comments that recovery will be slow and protracted.  For his part Governor King warned that there were still downside risks to the recovery and that inflation is more likely than not to drop below 2%.  Dale chipped in with confirmation that the February decision (not to continue with QE) was finely balanced.  The tone of these comments is sufficient to revitalise fears of double-dip recession in the UK although the revision to Q4 GDP on Friday could yet allay this threat.  The combination of slow growth, terrible public finances and the risk of a hung parliament after the spring election is not a good one for the pound.  Add to this the fact that recent US economic data has been on the firm side which has been lifting speculation that the Fed will be hiking rates ahead of other major central banks and the outlook for the pound vs the USD remains poor.  

The fall in cable helped the USD recover lost ground vs the EUR.  Early USD losses were encouraged by a spike higher in AUD/USD on the back of comments from RBA Deputy Governor Battellino that a floating currency is helping the Australian economy cope with the mining boom.  AUD/USD surged from 0.9010 to 0.9070 before profit-taking set in.   The early move in AUD/USD encouraged a weaker USD across the board with EUR/USD pushing as high at 1.3691 before reversing lower.  The weaker than expected German IFO index took the wind out of the EUR's sails.  The index fell back to 95.2 in Feb from 95.8 in Jan disappointing hopes that the German economy recovery was picking steam after failing to grow in Q4.  The IFO followed the release by suggesting that there is no reason for the ECB to hike interest rates this year.  This morning's soft French CPI and consumer spending data strengthen this argument.  Ahead of the start of US trading, the EUR has erased all of its early gains vs the USD.  Looking ahead, the market will be focused on Bernanke's testimony tomorrow for any signs that the Fed outlook on rates has changed.  In view of the fact that US inflation is still benign and unemployment rates still elevated it remains likely that Bernanke will restate that rates will remain low for an extended period.  An omission of this phrase will be a strongly bullish signal for the USD.  

Japan's poor fiscal position has been garnering its fair share of the limelight this week.  There is no getting away from the fact that Japan needs to commit itself to budget reform particularly given its ageing demographic.  However, amongst other factors Japan's high savings ratio and the fact that a large proportion of its debt is held domestically mean that a comparison with Greece is unwarranted.  That said Japan's economic woes (slow growth and deflationary threat) and policy constraints (rates are close to zero and debt should be constraining fiscal spending) serve as a reminder why a weaker JPY would be welcomed by politicians and exporters alike.
US house price indices, the Richmond Fed manufacturing index and consumer confidence are all due.  
Jane Foley
Research Director