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Fundamental Morning Wrap: Could the Fed GBP any more in focus?

A look across the mornings institutional research shows a particular shift in themes. Europe and Japan are out, New Zealand is making up the numbers and the UK and US are in primary focus. With the BoE looking like it is gearing up for further easing at a time where the Fed is toying with the idea of taking some measures off the table, its is easy to see where recent moves have originated, as markets look to discount probable future events.


Lee Hardman at the Bank of Tokyo Mitsubishi UFJ notes that yesterday´s BoE minutes show that the MPC is much closer to expanding gilt purchases then expected given the significant upward revision to inflation, with Governor King joined by MPC members Miles and Fisher in voting for a further GBP25.0 billion expansion. Jim Reid of Deutsche Bank notes that the BoE minutes surprised the market, commenting that the last time that this voting pattern took place was in June 2012, the month before the MPC voted for an additional GBP 50bln of easing. UBS analysts Geoffrey Yu and Gareth Barry ponder, “whether incorporating a weaker currency officially into BoE policy is fast becoming a moot point if markets have already fully factored this in and allow commensurate adjustment in the economy.” Greg Gibbs of RBS writes, “I tend not to mention the so-called currency wars, but if any new battle-ship was entering the fray it is HMS-Bank of England. One could be excused for concluding that the BoE wants to emulate the recent experience in Japan, damn the torpedoes and drive the GBP down.”


Danske Bank analysts note that European PMIs have become back into focus again, while Kit Juckes of SocGen feels that we are still in a EUR/USD range, and a break of the uptrend since last summer needs to be watched. Looking ahead to the Italian election, ING economist Paolo Pizzoli comments that he expects a pragmatic approach to be adopted on both sides after the vote, with the European framework as the fil-rouge of any compromise.


Kit Juckes of SocGen notes that USD/JPY may now be in a 90-95 range and may stay their for the rest of the first half of the year, but the long-term yen bearish story is clear. It's worth remembering that this move has gone far further, far faster than even committed yen bears could have expected and some position reduction would be healthy.


Mike Jones of BNZ notes that overnight, NZD/USD finally succame to the inevitable pullback, and with Italian election uncertainty, the US sequester, and overweight speculative positioning means further downside looks compelling in the near-term. However, he feels that support around 0.8250-0.8300 looks solid and the uptrend should resume before long.


Marc Chandler of Brown Brothers Harriman notes that the dollar firmed overnight off the back of the FOMC decision. He notes that the key takeaway is that the Fed's views about the exit strategy are still evolving and it is a mistake to read into the Jan minutes a clarity or decisiveness. Next month's FOMC minutes will be more important as the Fed will evaluate the impact of the long-term asset purchases. Lee Hardman at the Bank of Tokyo Mitsubishi UFJ notes that the minutes revealed that the “many” Fed officials are becoming “concerned about the costs and risks of further asset purchases”. He adds “A number of participants” also noted that such concerns could prompt the Fed to begin reducing the size of monthly asset purchases or even end the programme before it judged that a substantial improvement in the labour market had occurred.

UBS analysts Geoffrey Yu and Gareth Barry however feel that despite the rhetoric, the Fed as a whole is not in any risk of moving beyond debates.Danske Bank analysts note that over risk sentiment is in decline following the FOMC minutes last night, with the S&P 500 dropping 1.2% from a 5 year high. Meanwhile, Jim Reid of Deutsche Bank notes that good news can be seen in the Brent Crude price dip 1.63% to $115.6/bbl, the biggest drop in three months, with silver falling more than 3% and gold declining to an almost eight-month low. Greg Gibbs of RBS feels that if it were not for the fiscal uncertainty and the strong USD, the Fed would be close to signalling fewer purchases. This is important and means the ongoing QE is far from unconditional. Given risky assets have had a strong run in recent months, based in part on QE-infinity as some have dubbed it, there is a significant risk of further correction.

Forex: USD/JPY finds traction at support

The USD/JPY has fallen Thursday as the yen – left for dead in recent weeks – has finally managed to hold its own against its US counterpart. Ahead of a tranche of US data that looks to dominate afternoon trading, the pair has edged lower and is trading just under calculated support (93.34) at 93.27/28 in these moments, down a sizable -0.31%.
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