FOREX: British Pound Vulnerable But Euro Recovery May Continue

DailyFX   |  January 25 2012 2:34 EST

The British Pound may fall if a negative GDP print and minutes from January’s BOE meeting stoke QE added bets. The Euro recovery looks likely to continue.

Talking Points

• British Pound Vulnerable if BOE Minutes, GDP Data Point to More QE
• Euro Recovery to Find Added Fuel as German IFO Gains for Third Month
• Australian Dollar Outperforms, Japanese Yen Slumps in Overnight Trade

UK Gross Domestic Product figures headline the economic calendar in European hours, with expectations calling for output to shrink 0.1 percent, marking the first contraction in a year. Against this backdrop, the Bank of England will release minutes from its January 12 policy meeting, with traders keen to see if any members of the rate-setting MPC committee voted for an expansion of quantitative easing (QE). Policymakers voted in a 75 billion increase in asset purchases in October and unanimously opted to adopt a wait-and-see approach at the following two meetings. An increase in the probability of additional stimulus – whether from a worse than expected GDP print or the emergence of dissenting doves on the MPC – is likely to weigh on the British Pound.

Turning to the Euro area, the German IFO business confidence gauge is expected to rise for the third consecutive month in January, perpetuating the trend of improving regional data since the beginning of the month. While signs of strength in the currency bloc’s top economy are certainly nothing new and offer no meaningful counterbalance to the debt crisis headwinds still plaguing the region, the outcome may be enough to continue driving profit-taking on short Euro positions that has helped the single currency recover over the past week. Net-short speculative bets against the Euro hit another record high last week and traders are almost certainly looking to lighten up on exposure ahead of next week’s EU leaders’ summit.

The Australian Dollar outperformed in overnight trade, rising against all of its major counterparts, after core inflation accelerated more than expected in the fourth quarter. The RBA Trimmed Mean, a measure of the underlying trend in price growth, rose 2.6 percent from the previous year, topping expectations for a print at 2.4 percent. Traders seemingly took the outcome to mean the central would now be more reluctant to cut interest rates at its next policy meeting in early February, although priced-in expectations of a reduction remain elevated at 84 percent. The headline CPI inflation rate slowed to 3.1 percent.

The Japanese Yen slumped after the Ministry of Finance reported the island nation posted its first trade deficit in 31 years, showing a shortfall of 2.49 trillion. Exports fell 8 percent from a year before in December, marking the third consecutive decline and the largest in seven months. Previously, surplus capital inflows were often recycled into government bonds, providing the highly indebted government with a cheap and reliable funding source. The emergence of a deficit threatens this dynamic, hinting the government may find itself unable to finance its obligations, creating another flashpoint of sovereign stress to couple the fiasco in the Eurozone.

Asia Session: What Happened

Euro Session: What to Expect

Critical Levels

--- Written by Ilya Spivak, Currency Strategist for Dailyfx.com

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