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Fundamental Afternoon Wrap: Europe and UK in focus as global flash points dim

A slow afternoon for institutional research shows that the Euro and the Pound have fallen in focus, with much attention being put on the pending central bank meetings this Friday. Opinion seems to be split on what action will be taken, if any, while Japanese and US issues look to have been swept under the carpet for the afternoon at least.


Brown Brothers Harriman analysts note that for most countries the service sector PMI surveys will likely confirm what the market already knows, outside of Germany, Europe is struggling. Further they add that there doesn´t seem to be any sign that the contraction in most countries is stabilising. They also feel that the upcoming ECB meeting will attract attention following increased chatter of a rate cut, however they remain more sanguine. Geoffrey Yu and Gareth Barry of UBS comment that despite the difficult political situation in Italy, investors arereacting with more calm compared to post-elections in Greece last year. They write, “The ECB has stronger tools for markets to contend with, and the economic outlook has improved for now, albeit from very low levels and expectations. As such, we believe positioning is quite favourable.”

TD Securities analysts note that the Euro has been a middle of the pack performer since the start of the week, with consolidation the clearest theme without any significant catalysts over the weekend. They see that the broader trend remains bearish but for the week ahead they feel it may be prudent to wait for Thursdays ECB meeting before taking action.


Brown Brothers Harriman analysts note that in the UK, BoE Governor King wanted to resume Gilt purchases last month and was outvoted, which puts this months vote in particular focus. Since the economic climate has deteriorated and with the impact of the Funding for Lending scheme appearing to wane, more MPC members seem sympathetic. Phillip Rush of Nomura notes that there is little evidence that the Funding for Lending scheme is imparting much stimulus and he doesn´t believe that it can do, while in the present of strict regulatory pressure to deleverage. Nor is it tying sufficient funding to Bank rate for a cut to be worthwhile. He writes, “Increasingly repressive policies are being brought up, but softer communication changes are likely to come first.” Geoffrey Yu and Gareth Barry of UBS note that GBP remains heavily short but not outsized by historical proportions. they suspect that some shorts are in play due to suspicion of a pending rate cut or an increase in asset purchases.

Forex: GBP/USD closer to last week's low on US session

The plunging post-UK PMI Construction data found support at the 1.5000 psychological level. From there, the GBP/USD retraced all of its losses and started moving higher ahead of the US session and ISM New York. After reaching as high as 1.5072 on the publication, the pair is currently resting a little lower. Last week's low as 1.5074.
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Forex Flash: USD/CAD aims higher with BoC on Wednesday – TD Securities

TD Securities analysts expect a busy week, with employment reports in Canada and the US and central bank meetings (the BoC FAD is Wednesday): “The BoC will keep policy on hold.  We see a small, but not insignificant, risk that the BoC further moderates its language in the wake of the softer economic data trends (growth and inflation) evident through the latter part of last year, however.  US-Canada spread compression continues at the short end of the curve as BoC rate hike risks are slowly erased (the 2-year gap has dropped to 70 bps today, from a 95bps premium for Canadian 2-year bonds in the middle of January)”, wrote analysts Shaun Osborne and Greg Moore. “Still, we think a further moderation in the BoC language would undercut a soft-looking CAD a little more still”, they added.
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