Daily Market Report 21/02/2013

Two contrary stances on monetary policy either side of the pond dominated headlines in the currency markets yesterday with the pound weakening against most of its peers and the US dollar gaining against all but one of its peers.

Yesterday morning the Bank of England was more dovish than expected as two additional members of the monetary policy committee voted to expand the current quantitative easing program, a move that would typically devalue a currency.  Mervyn King and Paul Fisher joined David Miles stance to increase the bond purchasing programme by £25 billion to £400 billion with the other six members voting to keep the programme unchanged. All 9 members did however decide to keep interest rates at 0.5%

To add to the woes of the pound, the unemployment rate in the UK increased to 7.8%, pushing the currency to a 15 month low against the euro.

Later on in the evening the Federal Open Market Committee minutes revealed that several policy makers commented that the central bank should vary the pace of bond purchases, signalling a possible end to quantitative easing in the US. The stance was less dovish than the market anticipated and thus eased concern of deterioration in the value of the US dollar. Earlier in the day, data showed that the producer price index only rose to 0.2% instead of 0.3%. The news enticed appetite for the US dollar causing it rise to a 2 ½ year high against the pound and a one month high against the euro.

In the euro zone, the rate of inflation in Germany fell to 1.7% whilst the producer price index rose to 1.7%. However consumer confidence in the euro area in February fell short of market expectation, coming in at -23.6 instead of -23.1, limiting the euro’s gains against the pound.

Manufacturing figures from France, Germany and the euro zone all fell short of market expectations causing the euro to weaken in early trade. Investors will be keeping an eye on 10 year bond sales from France and Spain as well as 10 year gilt auctions in the UK. On the data front public sector net borrowing figures are due for release in the UK as well as inflation and manufacturing figures from the US.

Key Announcements:

9.30am – GBP – Public Sector Borrowing: Expected to improve to a -£11.200bln.

13.30pm – USD – Consumer Price Index: Expected to fall to 1.6%.

13.30pm – USD – Initial Jobless Claims: Expected to rise to 355k.

13.58pm – USD – Markit Manufacturing PMI: Expected to fall to 55.5.

15.00pm – USD – Existing Home Sales: Expected to fall to -0.7%.

15.00pm – USD – Philadelphia Fed Manufacturing Survey: Expected to rise to 1.