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IMS FX DAILY MORNING REPORT - Wednesday 26th January 2011

Today's Interbank rates -

POUNDS TO US DOLLARS 1.5822
POUNDS TO EUROS 1.1538
POUNDS TO AUSTRALIAN DOLLARS 1.5859

EUROS TO US DOLLARS 1.3712
EUROS TO POUNDS 0.8666
EUROS TO AUSTRALIAN DOLLARS 1.3746

POUND HEADLINES:

• Yesterdays GDP shock diminishes Bank of England minutes impact. Although the latest GDP figure has clearly been impacted by severe end 2010 weather conditions it looks set to underpin UK rate expectations for the foreseeable future.
• Its hard to find anything positive to say about yesterdays UK GDP data. The weather effects don't account for the weakness in services in October and November, and the concern for sterling must now be that the rise in inflation in December and the rise in VAT coming in January will further squeeze growth, so that even the revised market of an August/September rate hike starts to look too hawkish.
• At a time when the Governments austerity measures are increasingly on consumers' radar screens, such a softening in the growth trajectory, or at least the starting point for 2011 GDP deliberations, should leave the market in little doubt as to the profile for official rates. Following Mervyn King's latest speaking today's BOE minutes will offer some additional 'take' on the current centre of gravity on the MPC. But, while the current inflation backdrop is hardly comfortable from a policy maker's perspective, the increasing squeeze on real disposable incomes is unlikely to be entertained in the upcoming pay round negotiations. Current SONIA pricing indicates that the first 25bp hike in the Bank Rate has been pushed back to the start of Q4 from mid Q3.

EURO HEADLINES:

• Still no bad news for the Euro, though a few will look at the UK GDP data yesterday and worry that the apparent strength of the manufacturing sector in the Eurozone may not translate into particularly strong strong Q4 GDP, with the services PMIs showing a modest drop in the quarter.
• The dominant theme is still the fading of periphery panic, and there is nothing that will obviously derail the more positive tone on the calendar today.
• German Import Price Index for December month-on-month comes in at 2.3% higher than forecasts of 1.2%.

US DOLLAR HEADLINES:

• The dollar index continued to drift lower yesterday, in spite of stronger US consumer confidence data, and looks likely to remain soft into today's FOMC meeting as the market retains a broadly "risk on" tone. The USD inverse correlation with risk is likely to be retained as long as the Fed's retains its dovish stance.
• Tonight's FOMC minutes are therefore important, but recent comments from Bernanke and others don't suggest that the Fed is about to change its tone with unemployment still close to the highs of the cycle.
• Today at 3pm GMT we also have USD New Home Sales for December

If you need to buy, sell or make an international payment today then please call me for a free quote.

Kris Charalambides

FX Broker

kris@imsfx.co.uk

www.imsfx.co.uk

Tel: 0207 183 2790