Daily Financial Market Outlook

Overview & economic commentary

The BoE minutes of the February MPC meeting and January retail sales head up the UK calendar this week. The BoE Inflation Report set out the challenges facing the UK economy in the months ahead which essentially revolve around the threat of a significant acceleration in CPI inflation and the possibility of a sharp economic slowdown. A similar message is forecast to emerge from the February MPC meeting minutes on Wednesday, where we also expect to learn that the committee was unanimous in its decision to lower interest rates two weeks ago to 5.25%. Separately, anecdotal evidence from the BRC points to a modest rebound in UK retail sales in January from a 0.4% drop in December. The figures are due on Thursday and a stronger outcome may lead markets to scale back speculation of aggressive interest rate cuts (see chart below), one week after the labour market figures showed a decline in the unemployment rate to a 33-year low. Focus in the US will be on the FOMC minutes of the January 29/30 meeting, when the Fed cut rates 0.5% to 3.0%. The minutes are due on Wednesday and will include updated projections for 2008 growth and inflation. The Fed's current growth orientated policy bias and focus on the housing market mean that this week's figures for housing starts and building permits, due on Wednesday, may overshadow the January CPI data due on the same day. A relatively quiet week for the euro zone features the 'flash' manufacturing and services PMI surveys for February on Friday.

Currency commentary

US housing market data and the evolving credit rating story shadowing the US bond insurers could have a significant say over the direction of equity, bond and global fx markets this week. In the UK, the reporting season for banks, the MPC minutes and retail sales are likely to impact the direction of major sterling crosses. Sterling failed to build on last week's gains against most currencies and this suggests that the balance of risks is titled towards short term weakness. In price terms, the decline in £/$ back towards 1.9500 and a rise in €/£ towards 0.7550 could be on the cards, if UK retail sales disappoint and the euro zone PMI's show a healthy rebound. £/A$ drifted back towards the lower end of the range around 2.1561 and could well force a break below 2.1500 as speculation of a March RBA rate hike builds. $/Y topped out at 108.60 last week and new equity market jitters could pave the way for a return towards 106 region.

Major data and events today

Today

* UK Rightmove house prices
* Japan leading and coincident indices
* ECB speakers: Quaden (17:00), Garganas (18:30)
* Bank of Canada Governor Carney speaks (21:00)
* US markets closed for President’s Day

Tuesday

* Canada consumer prices, wholesale sales
* US Fed speaker: Stern (14:00)
* ECB speaker: Quaden (17:00)
* BoJ publishes MPC minutes (23:50

Wednesday

* UK M4 money supply, sterling lending, public finances, CBI industrial trends
* US consumer prices, housing starts, building permits
* German producer prices
* Canada int’l secs transactions
* BoE publishes minutes of February 6/7 MPC meeting (09:30)
* Fed publishes minutes of January 29/30 FOMC meeting (19:00)
* US Fed speaker: Poole (18:30)

Thursday

* UK retail sales
* US initial claims, Philadelphia Fed survey
* French consumer prices
* EU-15 current account

Friday

* French consumer spending, business confidence
* EU-15 manufacturing and services PMI (flash), industrial orders
* Canada retail sales
* BoJ speaker: Governor Fukui (03:00)
* ECB speaker: Gonzalez-Paramo (11:30)

Chart of the day: Markets are pricing in more than 50% probability that UK base rates will be below 5.0% by June. We think this is overdone.

EUR/USD: The upwards bias remains with interim targets at 1.4700 hit, move stops to 1.4625. Resistance at 1.4750 is the next minor objective from here, a break of which should open the way for 1.4900

USD/JPY: The bias to say long yen remains although a break o 107.10 would aid downward momentum. Main stops have been widened to 109.10 looking for 105.00 and 102.00. This could remain in a range for the next few weeks, but March is likely to prove a different story. CAD/YEN: Resistance sell level at 109.00 missed by a couple of pips- twice. Sell a rebound to 108.60 on stops over 109.10.

EUR/GBP: Sterling had it's best chance to break downwards on the recent run to 0.7400. 0.7390 remains the main trigger, but the question is where now? Stops have been hit at 0.7465 and 0.7500 should cap the short term gains, the longer term risk is reverting to 0.8000. Flexibility is key whilst we wait for a major signal.

DJ Stoxx Index. A potential symmetrical triangel formation here should keep the focus to the downside. 3,600 is the interim target with a break of 3521 the objective into March. Resistance at 3870 should cap rebounds on stops over 3920. The rebound in the baltic dry index continues, next key resistance is at 7463.


Lloyds TSB Bank

Posted in: Forex