Market Report

Sterling firmed slightly versus the dollar on Thursday, regaining some poise after sharp falls from this week's 14-year peaks prompted by uncertainty over Britain's monetary policy outlook. Wednesday's fall appeared to put the tantalising $2 level out of the pound's reach for now. There should be some movement later this afternoon with the release of US Durable Goods at 13.30 and US New Home Sales at 15.00.

The Euro was flat on the day having hit lows earlier this week at against GBP. In the Euro zone, the changes in the rate call seem to be leaning towards to a 4% peak. There is 95% chance of a March hike, and 65% chances of a June hike.

A below-consensus Japanese core CPI data hurt the yen this morning, further dampening expectations of a BoJ rate rise next month, a day after policy board member Suda's hawkish remarks. Core CPI for December rose 0.1% y/y (Cons: 0.2%) rise, depressing Japanese yields.

At 9.30, The British Bankers' Association releases mortgage approvals data for December. These will allow us to estimate the likely outturn for the overall Bank of England approvals number (which includes building societies), which will be released on 30 January.

DH

Sterling eased from the previous day's 14-year highs versus the dollar and the yen on Wednesday as January Bank of England minutes and comments from the BoE governor sowed doubts about the chances of more UK rate hikes. Minutes from the Bank of England's Monetary Policy Committee showed only five of its nine members had voted for this month's surprise interest rate hike to 5.25 percent -- a much closer outcome than the 7-2 split expected by the market. Coupled with comments late on Tuesday from Bank of England Governor Mervyn King that early action against high inflation may avoid the need for bigger rate rises later, the minutes cast some doubt on the likelihood of further monetary tightening

The Eurozone current account is expected to show a surplus of a Billion Euros' (£659m) in November from a balanced account of zero in October. The closely watched IFO German Business climate index is predicted to rise to 108.9 in January from 108.7 in the previous month. The headline index surprised on the upside for a fifth consecutive month in December, however January is more difficult to predict. While the retail and construction component of the index are predicted to be weaker due to the impact of the recent three-point VAT rise, these have only a small weighting. In contrast manufacturing, responsible for most of the recent strength in the index should continue to grow, economists commented.

The French business confidence index for January is predicted to remain at 106.0 the same reading as the previous months.

America whilst having a quiet week of data weekly jobless claims are seen as rising to 305,000, after falling to an 11 month low of 290,000 the week before. American home sales are expected to fall slightly fall slightly 6.25 units in December after rising to 6.28m in the prior month.

NC

The big news overnight was BoE governor King sounding a move dovish than he than the markets were prepared for, especially given he is usually of a more hawkish manner. King did warn that inflationary pressures had risen and that wages and price expectations needed to be anchored, however, more importantly he said that by raising rates early, the BoE should be able to avoid larger interest rate hikes in the future and he followed this by stating the Bank's central view was that CPI should ease 'quite sharply' over the second half of the year.

At 9:30, the minutes of the Bank of England's January meeting are published. We (and the consensus) think the Committee's decision to raise the official Bank Rate by 25bp was a split 7-2 vote. The first estimate of Q4 GDP growth is published at 9:30 as well. The strength of the services PMI (which measures activity in non-distribution private sector services), plus the fact that retail sales volumes grew a firm 1.4% in Q4 suggests that overall service sector output grew around 1% in the quarter. In addition, survey evidence from the CIPS report on manufacturing points to output growth of 0.3%. On an output basis, these sectors account for nearly 90% of the economy and are the key drivers of our forecasted 0.8% rise in GDP in Q4. That is in line with the Monetary Policy Committee's central projection. The consensus is expecting a print of 0.7%.

There is no US data today and a quite day for the Eurozone as we look for tomorrow key IFO survey.

Australia's headline CPI data surprised the market on the downside falling by 0.1% Q/Q and rising by 3.3% Y/Y. The RBA's statistical measures of underlying inflation both showed decelerations in inflation and disappointed the market on the downside. In our opinion, the Q4 CPI data make it unlikely that the RBA will hike rates in Feb and we continue to see that the RBA has finished hiking rates this tightening cycle. The Q4 CPI taken together with some signs from the cyclical data that domestic demand is easing suggests to us that underlying inflation has likely peaked. The Australian bills market rallied strongly on the back of the CPI data and the Aussie dollar was down sharply across the board.

RBNZ rates decision on Thursday, where we expect the RBNZ to leave rates on hold and weigh a bit on the Kiwi dollar.

DH

The pound rose to a four year high against the Euro yesterday, following a survey showed house prices climbed in January. The government reports fourth quarter GDP figures tomorrow (Wednesday), which according to a Bloomberg survey, could signal continued support for Sterling and will help to underpin expectations of further interest rate rises. Since the Bank of England raised interest rates on 11th Jan, The pound has gained more than two per cent against the Euro and the Dollar.

The Euro advanced against the dollar on speculation a survey this week, The Ifo Institutes Sentiment Index, will show German business confidence rose to a record level, bolstering the European Central Bank's case for raising interest rates.

The yen is expected to slide to it's weakest in almost four years against the dollar after minutes from the Bank of Japan's December meeting showed policy makers want to monitor more data before raising interest rates. The currency may fall a seventh day versus the dollar, the longest losing streak in 18 months, as lower rates reduce the appeal of Japanese assets to investors.

Elsewhere, The South African Rand reached a three week high as the price of gold and platinum advanced, boosting demand for the currency, in addition to expectations that a Government report will show inflation is accelerating, reinforcing the case for higher interest rates.

MA

The U.K. pound may gain after reports showed house prices rose in January and the economy will grow this year at the fastest pace since 2004. The pound gained more than 2 percent since policy makers boosted the benchmark repurchase rate on Jan. 11 on concern that faster inflation will feed through to wage demands. Futures trading shows investors expect the central bank to increase interest rates by a quarter point by March.

The dollar may strengthen on speculation reports this week will show U.S. home sales stabilized last month and orders for durable goods jumped. The U.S. currency may extend gains from last week, when it climbed to the highest in almost four years against the yen. Traders reduced bets the Federal Reserve will lower interest rates in coming months after reports last week showed U.S. new home sales and consumer sentiment were stronger than forecast.

The euro may gain almost 12 percent to $1.45 against the dollar by year-end as the European Central Bank welcomes a stronger currency to curb inflation. The euro strengthened 6.9 percent in the past 12 months as the ECB increased borrowing costs to 3.5 percent from 2.25 percent.

South Africa's rand gained on expectations a government report this week will show inflation is accelerating, reinforcing the case for higher interest rates and improving the appeal of assets denominated in the currency. The currency of Africa's largest economy posted its first back-to-back weekly gain in a month last week helped by higher precious metal prices. The gap, or yield, in spread between South African 10-year bonds and similar maturity Treasuries has widened 12 basis points since June 3.

Australian exporters are buying more currency hedges as the country's dollar heads toward a 10-year high, threatening profits. Exporters are buying contracts that allow them to profit from a stronger currency as gains in the Australian dollar erode the value of overseas profits. The Australian dollar is gaining amid speculation Reserve Bank of Australia Governor Glenn Stevens will raise interest rates to the highest in a decade as the nation enters its 16th year of expansion. The currency increased 0.8 percent to 78.98 U.S. cents last week as an index of leading economic indicators rose at the fastest pace in seven years.

LR

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