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IMS FX DAILY MORNING REPORT - 10th January 2011

Today's Interbank rates -

POUNDS TO US DOLLARS 1.5486
POUNDS TO EUROS 1.1996
POUNDS TO AUSTRALIAN DOLLARS 1.5642

EUROS TO US DOLLARS 1.2909
EUROS TO POUNDS 0.8335
EUROS TO AUSTRALIAN DOLLARS 1.3039

POUND HEADLINES:

• EUR/GBP broke lower on Friday, and the next target is the August low at 0.8140. This is mostly a EUR story, but Cameron's indication of concern about high inflation will be grist to the mill of the UK rate hawks, and may also provide some sterling support.
• In the spotlight this week are UK rate expectations. Several banks have increased their rate expectations in the past week, mainly because of the persistent inflation overshoot in the UK. Sterling appears to have benefited (though most of the trade-weighted gain has been due to EUR weakness rather than sterling strength). But we retain the view that UK inflation has been caused by a variety of factors that are likely to prove temporary, and the UK domestic demand strength is not one of them. Even if UK rates do rise in these circumstances, although this is unlikely given the trend in UK services PMI, rate hikes that are based on higher inflation rather than stronger growth should not be positive for the currency.
• UK house prices have continued to slip, falling by 1.3% in December from the previous month, figures from the Halifax have shown. The decline was less than falls seen in the second half of 2008.

EURO HEADLINES:

• The EU periphery debt saga continues, with Portugal now reported to be under pressure to accept a bailout, though this is been denied. This weeks Portuguese and Spanish auctions are near certain to attract decent demand, but will not change market sentiment on the Euro which continues to require some more permanent credible arrangements for dealing with debt problems if it is to stabilise.
• Eurozone Sentix Investor confidence for January comes in at 10.6 missing expectations of 11.8.
• French manufacturing for November month-on-month comes in at 2.2% beating expectations of 0.8%. The year-on-year figure is 5.1% beating expectations of 3.6%. French Industrial production for November
  month-on-month comes in at 2.3% beating expectations of 1.0%

US DOLLAR HEADLINES:

• The employment report on Friday turned out to be as expected, with the revisions and the decline in unemployment compensating for a disappointing headline number. The underlying picture is still that US growth is at trend and consequently unemployment is unlikely to fall significantly any time soon.
• The US economy is showing signs of a "self-sustaining recovery", but is not growing fast enough to reduce high jobless levels, Fed Reserve Chairman Ben Bernanke has said. Mr Bernanke also said that it could take four to five years for the job market to normalise. As well as unemployment low inflation is also a concern.
• China's trade surplus shrank to an eight month low in December it has been confirmed. Imports increased by 25.6% on the same month a year earlier, leaving China with a surplus of $13.1bn ($8.4bn). Analysts said the data may give Beijing grounds to fend off US pressure for faster currency appreciation ahead of Chinese President Hu Jintao's visit to the United States next week. Many US politicians and economists accuse China of manipulating the value of the Yuan in order to boost its net exports at the expense of its trading partners.

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Kris Charalambides

FX Broker

kris@imsfx.co.uk

www.imsfx.co.uk

Tel: 0207 183 2790