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IMS FX DAILY MORNING REPORT - Friday 28th January 2011

Today's Interbank rates -

POUNDS TO US DOLLARS 1.5877
POUNDS TO EUROS 1.1577
POUNDS TO AUSTRALIAN DOLLARS 1.6005

EUROS TO US DOLLARS 1.3714
EUROS TO POUNDS 0.8637
EUROS TO AUSTRALIAN DOLLARS 1.3825

POUND HEADLINES:

• At one point yesterday the market had returned to pre-GDP levels in pricing UK rate expectations, but short sterling moved off the lows by the end of the day, and we suspect it is becoming clearer that the Q4 decline in GDP is not entirely snow related, and that Martin Weales vote for higher rates in January is unlikely to be repeated in February.
• Sterling should consequently now be vulnerable to renewed declines, especially after the consumer confidence data overnight, with the 1.60 level in GBP/USD now looking hard to breach on a sustained basis, especially since the comparison of today's US GDP with UK GDP will not benefit sterling sentiment.
• Next week in the UK we have indices measuring activity in three key sectors - manufacturing, services and construction - are due for release. This will likely keep sterling vulnerable to the downside.

EURO HEADLINES:

• Bini-Smaghi helped sustain the euro positive tone yesterday with his insistence that import price pressures cannot be ignored, even though the German CPI data hardly gave any reason for inflation concern.
• At the same time, a modest widening in EU periphery spreads gave less reason to be significantly EU positive. This is still the key focus over the medium term, and with EUR/USD hitting some key resistance levels yesterday and the ECB meeting and EU summit next week the upside is looking less attractive.
• In the Eurozone today, M3 money supply figures for December are likely to show the pace of growth accelerating, aided by improvements in private sector lending.

US DOLLAR HEADLINES:

• The dollar remains under steady downward pressure, though we are approaching some important target levels against a range of currencies.
• Today's GDP data will be the focus, and the USD will probably suffer on any as expected or slightly weaker than expected data. With a light calendar elsewhere today, the spotlight for today falls firmly on the US economy. Led by strong growth in consumer spending and exports, we are above the consensus in expecting a firmer reading for Q4 economic growth of 3.8% on an annualised basis.
• The final estimate of University of Michigan confidence for December is expected to show a slight upward revision on the back of recent tax cut extensions announced by President Obama.

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Kris Charalambides

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www.imsfx.co.uk

Tel: 0207 183 2790