Talking Points
• Yen: Below 113.00 as Nikkei sells off
• Pound: 9-0 MPC vote puts 25bp cut in January on the agenda
• Euro: IFO declines further
• US Dollar: Only MBA applications on tap
Tonight’s release of the BoE minutes revealed that all nine members of the Monetary Policy Committee voted to cut rates in December stating that the “downside risks to the economy outweighed near-term concerns about higher inflation.” The news sent cable tumbling through the 2.1000 figure and the currency now appears very vulnerable to a test of the critically important 2.000 level sometime this week.
As we argued yesterday, ”The release of the BoE minutes should provide the market with some clues as to the overall bias of the MPC members - however, the true test of the bear pound premise may not come until Friday’s release of UK Retail Sales.
In October the number actually contracted on a month over month basis providing an early warning of a slowdown in UK economy. This month consensus calls are for a modest 0.2% gain, but if Retail Sales surprise to the downside again contracting for the second month in a row, expectations of a January rate cut by the BoE will increase markedly and that news could possibly push cable through the 2.0000 support.”
Given the 9-0 vote however, traders may not wait until Friday and could to push cable below 2.0000 sometime today. The uniformity of opinion from the BoE suggests that UK monetary officials are clearly worried about the rate of deceleration in UK economy and will likely choose to err on the side of easing in January. This leaves only the ECB as the sole hawkish central bank left in the G-4 universe and as a result EURGBP continued to appreciate in post release trade targeting the 7200 figure once again.
Although ECB chief Jean Claude Trichet remains unapologetically hawkish, evidence is mounting that the EZ is experiencing a slowdown of its own. Today’s IFO survey reached its lowest level in almost two years as higher oil and credit problems weighed on the region’s producers. Nevertheless, the drop in IFO was relatively minor from the period prior and should not materially alter ECB’s overall view. The euro therefore remains a bastion of strength in comparison to the pound.
