Sterling Digest, February 4 2013: week of the central banker

Bank of England at Night - Arsat 30mm Fisheye lens on Flickr

BoE at night – What happens behind closed doors?

This is the week of central banks as the market looks ahead to 3 central bank announcements from the Bank of England, the European Central Bank and the Reserve Bank of Australia. After consolidating most of last week, sterling diverged in Friday’s price action weakening against every major currency except the JPY. While the USD weakened on a NFP miss against the EUR and NZD, it gained against the GBP. The reason is a fundamental one. The US economy is in better shape than the UK. While both were surprisingly disappointing, US GDP contracted by less than the UK GDP. UK manufacturing PMI missed expectations; US ISM exceeded expectations. The $FED is on hold; the BoE is dovish and likely to enact another round of QE. Following the announcements already from the BoJ, RBNZ, and FOMC, this week’s announcements should complete the fundamental differences in the major currencies. With the forex market now trading on fundamentals (and not risk appetite), the best trades now become the ones that exploit the stark differences in fundamentals.

 

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