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Fundamental Afternoon Wrap: What happened to the sequester?

This weeks final institutional research wrap sees a focus on the weak European PMIs and a surprising lack of content on the US sequester which looks set to come into play. Elsewhere, GBP/USD looks set to continue its nose dive, with 1.40 looking like a viable target.


Michaela Moran of BAML comments that she is currently revising her EU GDP projections and now expects GDP to contract by 0.5% in 2013 and inflatyion to stand at 1.8%. Meanwhile Brown Brothers Harriman analysts note that poor European PMIs have been the main driver today, with the US sequester and Italian political stalemate seemingly pushed to the background. They add that the euro, which had edged up to $1.31 in late Asia/early Europe, was sold on the PMIs and returned to the week's low near $1.3020.

Meanwhile Jim Reid of Deutsche Bank notes that Italian yields have declined on hopes that a coalition government can be formed, with the most probably paring being between Bersani and Berlusconi. However he adds that reports have surfaced claiming that the latter is under investigation on suspicion of bribing a senator to change sides in parliament, although his lawyer has denied the claim. Kit Juckes of SocGen notes that the only good news today for Europe is in the BTP market which for now is holding up so that EURs decline is in relative isolation.


Michaela Moran of BAML believes that the BoE QE call in March will be especially close and her central expectations is that the BoE will leave QE on hold until March, but after the 6-3 vote in February, the vote will be close. Brown Brothers Harriman analysts note that a terrible UK PMI reading saw sterling plunge to touch 1.50. Kit Juckes of SocGen writes, “GBP/USD heading towards 1.40” following the awful PMI reading and he feels that the economy is flirting with a return to recession and monetary policy being out of juice.


Michaela Moran of BAML notes that while recession seems to be loosening its grip on Europe, across the pond, growth prospects are deteriorating and she expects most of the US fiscal sequester to remain in place. She comments on the growing bond bubble and notes that there is a risk of a 1994 sized bond sell off when the Fed exits QE, but in the short term she sees little reason to deter further asset buying today. Jim Reid of Deutsche Bank notes reports that President Obama has invited congressional leaders for a White House meeting today, but expectations for a meeting are low.

Session Recap: Broad gains for the dollar

The US dollar remains buoyed on Friday as soft global data and the 'sequester' have contributed to the market's cautious mood and benefited the USD for its safe-haven role. US political leaders failed to reach an agreement on alternative budget savings triggering automatic spending cuts. The euro fell below the 1.3000 mark and hit a fresh yearly low at 1.2983, while the pound is among the worst performers, having fallen to a 31-month low of 1.4997 weighed by weaker-than-expected US data. Meanwhile, the CAD found some support from Canadian GDP readings and reversed losses against the greenback. The Aussie and the yen are slightly lower.
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Forex: EUR/USD extends losses to fresh 7-week low

The shared currency has extended its decline versus the dollar, as the US currency continues to capitalize risk-off flows. EUR/USD broke below the 1.3000 mark at the beginning of the New York session and has been moving steadily to the downside ever since.
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