Market Report

As expected, the Bank of England kept interest rates on hold, and the European Central Bank also kept rates on hold. After the decision by the Bank of England sterling lost ground against most major currencies as the belief is that last months surprise rate hike is not the start of many rises, and infact this could be the top of the current cycle.

Jean Claude Trichet, the ECB president has hinted that a rate hike in the Eurozone is almost a certainty next month.

At 9:30 this morning we see the release of the UK Trade Balance figures, which is expected to fall to £6.8bn in December (a fall from the £7.2 bn in November).

There is no economic data being released from the US today.

Have a nice weekend

DE

At noon today, The Bank of England (BoE) will announces it's decision on whether to raise interest rates for a second month in succession or wait another month or two. Volatility in the pound has increased, largely owing to people being more concerned that the BoE could shock the market again, as it did in January. The European Central Bank also stage their interest rate policy meeting today, and is expected to keep interest rate changes on hold, but will signal a hike in March in expressing vigilance on inflation.

The Yen fell yesterday for a third successive day against the Euro and the Dollar, following expectations that a further interest rate rise in Japan may be delayed following comments by policy maker Hidehiko Haru stating that the Bank of Japan needed to keep monetary conditions easy to achieve sustainable growth.

Elsewhere, the Australian Dollar strengthened following a government report showing unemployment fell. The New Zealand Dollar also appreciated after similarly positive figures on a fall in it's jobless count and fast economic growth signaling a possible interest rate rise is likely.

Today, jobless claims are the only other data of note, with economists expecting another rise to approximately 315,000k. Any hawkish comments from the European Central Bank and Bank of England will undoubtedly provide a strengthening of the relevant currency.

MA

Sterling rose against the dollar and Euro on Tuesday after a robust British retail sales survey, which boosted expectations for higher interest rates this year, and speculation of more inflows related to corporate takeovers. The British Retail Consortium said British retail sales enjoyed their strongest January for three years, with growth accelerating at the fastest pace since July.

After delivering a surprise interest rate hike last month, the Bank of England is expected to leave rates unchanged at 5.25 percent on Thursday. But some investors are nervous the BoE could surprise markets again, which would attract yield-hungry funds into sterling.

The Swiss franc, which was already trading firmly, rallied further following comments from SNB Board Member Hildebrand that he saw higher risks for inflation and more rate hikes would be needed if growth remained robust. He also warned firms that FX rates were not fixed, clearly alluding to the weak level of the CHF.

The AUDUSD was little changed, remaining supported after the RBA left rates on hold overnight at 6.25%, as was widely expected though the yield on the 10yr rallied 3 tics. No statement was issued with the decision, but further insight to the banks reasoning may be gauged from the quarterly statement on monetary policy which is due to be released next Monday

British industrial production data is due on today at 9.30 and The US economic indicators due out today and for the balance of the week are not expected to be important market movers.

DH

The U.K. pound may drop on speculation the Bank of England will increase interest rates only once more this year. The U.K. currency fell yesterday after a report showed services growth in Europe's second-biggest economy slowed in January. Traders have raised bets on further BOE rate increases after the central bank increased its benchmark rate for the third time since August last month. The U.K. central bank's benchmark rate is 5.25 percent, a five-year high, as the economy grows at its quickest pace in two years, pushing inflation above the central bank's 2 percent target.

The dollar recouped losses on speculation foreign investors will buy Treasuries as the Federal Reserve refrains from cutting interest rates in coming months. The currency may rise for a fourth day against the euro after U.S. 10-year yields climbed half a percentage point in eight weeks.

The South African rand rose with other emerging market currencies, such as the Polish zloty and Turkish lira, as investor sentiment toward developing economies improved. The rand also advanced as precious metal prices rose. Gold and platinum account for about a fifth of exports in the $239 billion economy and the rand often moves in tandem with gold prices. Higher metal prices often mean a rise in revenue from abroad for the nation of about 47 million people.

The Australian dollar fell to the lowest in more than three weeks against the yen as traders bought Japan's currency before a Group of Seven meeting this weekend.

LR

Both the European Central Bank and the Bank of England are expected to hold interest rates on hold during their respective policy meetings this week. In the Eurozone, policymakers have been consistent in their calls for no let-up in price monitoring amid what they see as buoyant economic fundamentals. There are concerns that the January drop in oil prices may have stimulated demand in the Eurozone, resulting in stronger growth and increasing pressures on price as a result. Nevertheless, given the signals sent by ECB president Trichet during the press conference after the last meeting, the market widely expects rates to remain steady at 3.5%, and all ears will be listening for the key vigilance phrase-indicating a hike in March. In the UK, after last month's surprise hike we do not see any prospect for a further move this week. Nevertheless, with economic data indicating solid performance tightening expectations will probably remain firm and with the market largely believing that the MPC will now adopt a 'wait and see' strategy, with heavy reliance on data.

After last weeks data heavy week in the US there is little of note, with only the non-manufacturing ISM, Q4 unit labour costs, and weekly jobless claims of note this week. There is however plenty of Fed speakers, but only Philadelphia Fed President Plosser is speaking specifically on the economic outlook. We may need to wait for Bernanke testimony next week to get more clarity from the data-dependent Federal Reserve and as such the Fed Funds will most likely be unmoved by the end of the week. Today, non-manufacturing ISM for January is due at 15:00.

The pound may gain versus the dollar before a report that's forecast to show services growth held near the fastest in a decade. The pound rose last week after a report showed U.K. factory production unexpectedly accelerated. That may make the pound more attractive than the dollar or the euro. The Yen bounced back against the dollar on speculation European policy makers will voice concern that Japan's currency is too cheap, prompting traders to reverse record bets on declines. The currency also rose to a seven day high against the Euro. Elsewhere, the South African rand fell for a second day versus the dollar amid speculation the yield advantage offered by local assets may contract.

MA

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