Morning Report

Richard Driver, Analyst The euro suffered another slide yesterday, which took EUR/USD to new lows and dragged GBP/USD with it. Today’s session sees the European Central Bank make their monthly interest rate decision, and whilst there is a chance of a rate cut, a rate hold at the current 1.00% level looks more likely. Also today are bond auctions by Italy and Spain, which is bound to keep the market very much on edge. From the UK, we have some UK manufacturing and industrial production data to look forward to.
STERLING/EURO: Sterling actually lost a little ground against the euro (which remains weak itself), ahead of today’s key ECB meeting. After having cut rates at his first two meeting’s as President of the ECB, Draghi is expected to leave interest rates on hold at 1.00%. As far as quantitative easing is concerned, the market is likely to be disappointed. QE is seen as one of the tools with which the EU can really address its issues, but Germany remains in opposition, particular with inflation still high (though easing). The Bank of England will also be meeting today, but there are few expectations of anything other than an unchanged policy towards the 0.50% interest rate and 275B asset purchase facility (QE). Next month will be a different story though. This pair is trading just above 1.20 and may even dip below this level today.	FORECAST
STERLING/US DOLLAR: Dollar strength has taken this pair to its lowest level in a year and a half, with a key Fed policymaker even indicating an interest rate rise (though a long way away). US Federal Reserve policymaker Plosser has stated that the economic conditions may dictate that the US central bank may need to raise interest rates before mid-2013, as previously pledged. This would be highly supportive of the dollar. Data today is likely to show that US retail sales have grown further in recent weeks. Today’s eurozone bond auctions provide plenty of scope for further dollar safe-haven flows. This pair has now broken its trading range to the downside, as expected, and we are anticipating further moves down towards $1.50 in the coming weeks and months.	FORECAST
EURO/US DOLLAR: Rumours of a French ratings downgrade triggered some euro to dollar flows, and this pair is looking vulnerable. Rumours floated about yesterday that France will incur a debt downgrade from Standard & Poor’s. The extent of the downgrade could be critical, one notch may be already priced into the market at present, but a two-notch downgrade could hit the euro hard. This pair remains at very low levels close to $1.27 and we continue to look for further declines. It is difficult to see the euro bouncing back against the USD at present, with so many risks hanging over the single currency.	FORECAST
STERLING/AUSTRALIAN DOLLAR: Sterling continues its downtrend against the aussie dollar, despite some higher than expected Chinese inflation data. Expectations of monetary stimulus in China have built in recent weeks, but higher than expect Chinese inflation data (4.1% y/y) reduces the scope for this. As such the outlook for Chinese growth is marginally affected. Nonetheless, the Chinese inflation still eased and the aussie dollar marched on. The aussie dollar looks very overbought at these levels and must surely suffer from some profit-taking soon. It is also susceptible to a drying up of risk appetite as a result of events in the eurozone today.	FORECAST
STERLING/NEW ZEALAND DOLLAR: The kiwi dollar continues to outperform sterling, though eurozone bond auctions will test this. The kiwi dollar has been the top performing major currency so far this year. Kiwi commodity prices declined for the seventh consecutive month in December, but the NZD continues to make gains regardless. This pair is now trading at 1.92, but poor eurozone bond auctions have a habit of hitting risk appetite hard, which may help sterling bounce back against the commodity currencies today.	FORECAST
STERLING/CANADIAN DOLLAR: Sterling has had a poor few sessions of late, having lost three cents against the Canadian dollar.   This pair has fallen sharply from October’s highs above 1.63 and now looks to be targeting another visit to September’s lows below 1.55. The upturn in the US economy is primarily responsible for this, as well as evidence of ‘soft landing’ in China (a controlled decline in a still solid growth rate rather than a crash). This pair is currently trading below 1.56 and we think today’s session could finally see this pair bounce a little.	FORECAST
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