â€¢ Yen: Lower as Nikkei takes cue from Dow
â€¢ Pound: MP and IP surprise to the upside all eyes on BoE
â€¢ Euro: Trichet holds the key
â€¢ US Dollar: Jobless claims on tap
Central bank announcement night in FX and as might be expected trading is cautious ahead of the key monetary events later in the day. Both the BoE and the ECB will set their interest rate policy at 12GMT and 12:45GMT respectively. The currency markets forecast no change out of the ECB but nearly half of analysts expect the BoE to lower rates by 25bp to 5.5%.
UK data has been woeful of late with Retail Sales, consumer sentiment and housing surveys all missing the mark. But while the economic news from British Isles has certainly shown a slowdown in aggregate demand it has not conclusively demonstrated risk of possible recession. PMI Manufacturing for example has remained surprisingly robust and todayâ€™s Industrial Production and Manufacturing Production data both exceeded forecasts printing at 0.4% vs. 0.2% and 0.3% vs. 0.2% respectively.
Pound bears however, argue that UK economic woes are not centered in industry, but rather in services. As the center of global capital finance, UK is perhaps more vulnerable than any other G-10 country to the credit crunch affecting the financial sector. As such, pound shorts state that BoE must lower rates in order to ease the credit conditions and avoid further stress to the system. Yet if the BoE chooses to remain neutral keeping rates at 5.75% for the time being, cable could see a strong snap back rally. The unit has been sold down heavily on anticipation of a rate cut and if none is forthcoming the late arriving shorts may be forced to cover.
Meanwhile the EURUSD continued to weaken against the greenback after yesterdayâ€™s very strong ADP reading which suggested that the NFP will print well above 100K. But the ECB press conference is likely to drive trade today. Despite the fact that price pressures remain elevated in the 13 member region, most traders expect the ECB to remain stationary well into Q1 of 2008. However, the focus this morning will be squarely on ECB President Jean Claude Trichet. If Trichet hints at a possible hike in January the EURUSD could reverse its losses as quickly as it sustained them.