Morning Report

Richard Driver, Analyst Amid a rare shortage of market-moving headlines, yesterday was a session of plenty of range-bound trading. Today’s session brings a crucial US and indeed global economic indicator; the advance American GDP figure for the fourth quarter of 2011. The US economy is expected to have grown at an annualised pace of 3.0%, which when compared to the UK’s 0.2% contraction, goes some way to explaining our preference of the US dollar to sterling this year. This afternoon also brings some words from ECB President Draghi and no doubt some speculation about a Greek deal, as another week threatens to have passed with no progress.
STERLING/EURO: Data from the UK economy has started 2012 poorly, but this pair remains supported at the €1.19 level. In addition to the disappointing UK GDP figure on Wednesday, we saw the worst showing on the monthly CBI realized sales gauge in almost three years. The pressure will remain on sterling next week, with January’s monthly instalment of growth figures due from the UK construction, manufacturing and services sectors. There has been talk in recent sessions of a Greek deal by the end of the week, but it seems likely that we will be disappointed. All the while, concerns are building around Portugal. This pair is trading up towards €1.20 this morning.	FORECAST
STERLING/US DOLLAR: The dollar remains under pressure from Wednesday night’s dovish news from the Federal Reserve. Sterling maintained the front foot against the US dollar, as appetite for risky assets continued on their upward trend and weakened the greenback. Durable goods data was good yesterday and US GDP is likely to be strong today as well. The US housing sector remains in trouble and obviously unemployment is still a top priority, but generally speaking the US economy is starting to enjoy a fairly broad-based recovery. Sterling continues to trade up at an impressive $1.57 level and we are still betting that this pair could decline (fairly sharply) at some point soon.	FORECAST
EURO/US DOLLAR: This pair climbed to a six-week high, five cents off mid-January’s lows, despite ongoing Greek worries. There has been plenty of talk in the headlines about Greece’s need to get this deal done and the need to avoid a chaotic default in March. This is capping this euro rally to some extent. Also capping the euro’s gain were rising Portuguese bond yields, the market is beginning to realise that even if the Greek situation does resolve itself, Portugal is likely to take a similar path and beyond this, possibly Italy and Spain. This is why we bet on a weaker euro this year.    Nonetheless, this pair is trading at a relatively impressive $1.31 this morning and we could see further upside here for the time being.	FORECAST
STERLING/AUSTRALIAN DOLLAR: Sterling remains close to record lows against the aussie dollar, with Russia looking at investing in the Antipodean currency. Russia has expressed an interest in the Australian dollar, as it attempts to diversify away from GBP, EUR and USD.  Australian growth, while it will slow down in line with China, remains ahead of most developed global economies. Importantly, Australia has maintained its AAA credit rating. They key downside risks to the aussie dollar are interest rate cuts and rhetoric from the Reserve Bank of Australia against the strength of its currency. Accordingly, this pair is trading down below 1.48 and sterling is likely to remain under pressure today.	FORECAST
STERLING/NEW ZEALAND DOLLAR: Sterling continued on its downtrend against the kiwi dollar, which was helped by some strong NZ trade balance data. The kiwi dollar benefitted from an unexpected trade surplus in December, its first in five months. The kiwi dollar has proven increasingly resistant to alarm bells from the eurozone of late, which removes a lot of the downside risks to NZ currency. This pair is trading below 1.91 and should remain under plenty of pressure if the US GDp figure comes in strong as expected.	FORECAST
STERLING/CANADIAN DOLLAR: Weaker US stocks weighed on the Canadian dollar yesterday and sterling was able to recoup a modicum of ground. The US economy’s two weak points were highlighted yesterday, with weekly unemployment claims rising unexpectedly and US home sales dropping unexpectedly. Still, the big news this week that Fed rates will remain at record lows until late 2014, combined with what is likely to be a strong US GDP figure this afternoon, should keep the loonie strong against sterling. Sterling is trading around the 1.57 mark and we expect the loonie to regain the initiative today.	FORECAST
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