Cable has been trying to form a base above the USD1.4650 this morning but as yet its efforts are half-hearted with the overwhelming sentiment in the market remaining negative and both fundamental and technical indicators warning of the potential of further falls. There were no UK economic releases to divert attention away from the appalling truth that the combination of low growth expectations and a crippling budget deficit have opened the risks of a funding crisis (if the government does not show signs of getting the budget in order) or a double dip recession (if too much austerity is introduced too soon). There may exist a narrow policy path a UK government could steer that would allow for improved fiscal management and moderate growth, but since the chances of a hung parliament are failing to disperse with just 2 months to go before the favoured election date, it is increasing likely the new government will lack the backing to take any difficult decisions. Technicals are suggesting that in the absence of a recovery above the GBP/USD1.51 level, cable has scope to head towards 1.4680 initially.

Sterling has had a better day vs the EUR. This, however, is largely due to a generally softer EUR. While the market is still of the opinion that Greece will be offered some sort of guarantee from the EU which will prevent a default, the EUR is far from being out of the woods. The European Commission is under pressure to ensure that there will be 'strings' attached to any support plan for Greece. If EMU is to reassert its credibility than it must be seen as being able to compel member countries to adhere to fiscal constraints, otherwise Greece would be in danger from bouncing from one fiscal crisis to the next. The difficulty is that Greece is not in a good position to start enacting aggressive reform insofar as the government is already juggling recession and strike action; a situation compounded by the (still) strong EUR and risk of credit downgrading. The fiscal difficulties facing Greece and potentially other countries in EMU could weigh on the EUR for months to come.

The RBA hiked interest rates by 25bps to 4% overnight judging that it was appropriate for rates to be closer to average. AUD/USD failed to hold above 0.9010 on the news partly on the expectation that rates may now be stable for a period of several months. That said, in all likelihood the RBA will hike again before the Fed, the ECB or the BoE and overall the AUD retains a firm bias. GBP/AUD remains a whisker above yesterday's 1.6546 low, EUR/AUD continued to probe the downside hitting 1.4966 this morning. The BoC meets today. Insofar as the BoC has indicated that there will be no policy change until the middle of the year, the meeting should not have too much bearing on the CAD.

Swiss Q4 GDP registered a much stronger than expected +0.7% q/q. An attempt by EUR/CHF to push below 1.4828 this morning proved to be short-lived with the SNB's Feb 5 intervention still having an impact. That said, these strong data do reassert the likelihood that the SNB will step back from aggressive action to keep policy loose and could reinforce the medium-term downtrend in EUR/CHF.

Comments from Financial Services Minister Kamei overnight that the BoJ should comtemplate buying debt direct from the MoF are suggestive of the talks that continue within the government of what could be done to support the economy. Further measures from the BoJ may be announced in the coming months which would support a push higher in USD/JPY this year.

Aside from the BoC meeting, US consumer confidence and vehicle sales data are due.

Jane Foley
Research Director