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Fundamental Afternoon Wrap: GBP bucks the trend as the strongest performer of the day

This afternoons institutional research has a broad theme, spanning across all leading currencies, with a particular interest in the Italian political situation and the BoJ pivot. Also, the ongoing question on what is happening with GBP is another highlight, as the currency surprisingly is the strongest of the day.

EUR

Michaela Moran of BAML believes that the ECB is not as bland as many believe. She feels that during Thursday's ECB meeting, Mario Draghi presented some small revisions to the ECB staff projections, but that did not warrant a rate cut. Meanwhile BBH analysts note that the newly elected parliament in Italy is to formally sit on Friday and elect a president in each chamber (over the weekend), but they are still not clear what happens next.

JPY

Michaela Moran of BAML notes that the time for BoJ change is drawing ever closer and comments that remarks at lower house committee hearings, the nominees for BoJ governor and deputy governor indicated they would intend to extend the maturities of JGBs eligible for purchase, move up the switch to an open-ended asset purchasing method, and revise the banknote rule. regarding the BoJ change, BBH analysts notes that the only controversial element is the deputy Iwata. They write, “While the DPJ has expressed its opposition, the other small opposition parties have reportedly signaled their intent to support him.”, a point reiterated by Nomura strategist Yujiro Goto.

GBP

Michaela Moran of BAML believes that there will be no more QE just yet. She writes, “While the BoE left monetary policy on hold in March, the risks of more QE - perhaps after a change in their remit - roll over to April.” Meanwhile BBH analysts note that today, GBP is the strongest currency, with market talk centering around good demand for one month sterling calls struck near $1.55. They feel that this oculd reflect, 1) sterling bears buying some insurance and/or 2) bottom pickers anticipating a short squeeze ahead of the budget (March 20).

USD

ING economist James Knightley notes that US retail sales have risen 1.1% MoM in February, well above the 0.5% consensus expectations while there were some modest upward revisions to January’s data. He continues to add, “However the key concern is was happens as the fiscal tightening comes through? Fed Chairman Bernanke remains cautious on the outlook, fearing tax hikes and spending cuts could knock upwards of 1.5% off GDP growth this year. Given the political intransigence on long-term fiscal consolidation, we suspect the Fed will stick with its current purchases of $40bn of MBS and $45bn of Treasuries and next week’s FOMC meeting and beyond.”

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