The US Dollar had a less exciting day

!! FX Market Overview !!
I am sure you have read by now that UK inflation leapt up to 3.7% on
the government's preferred CPI measure; that's the largest jump
since the rate of inflation has been measured in this way and a full
1.7% above the Bank of England's central target rate. In normal
times that kind of news would cause an equally impressive rally in the
value of the Pound but, so constrained are the BOE by poor growth that
the reaction was rather muted. We did see a small scale rise in the
value of the Pound against the US Dollar and a similarly limp rise
against the Euro but the Pound as petty languid other than this. I
guess the problem is that no one can see the BOE hiking interest rates
to temper inflation in the short term so sterling does have the sort
of lure it might otherwise have. We get the UK employment data this
morning and a poor reading here is likely to undo any positive
movement the Pound experienced yesterday. However, jobs growth could
well result in the Pound making further gains. All eyes on the
newswires at 9.30 UK time.

The other news was a marked jump in German business confidence which,
as I have mentioned many times, was just another example of how at
odds the various members of the Eurozone are with each other. Greece,
Ireland, Belgium, Portugal, Spain and Italy are all suspected of being
on the brink of a financial abyss and would certainly be in deep water
without the funds and support that the EU and International Monetary
Fund have put at their disposal. So the question is whether there will
ever be a chance for the funding to be reduced without an unavoidable
collapse of some of these vulnerable states. I don't have an answer
but I am still amazed by how resilient the Euro has been. Germany may
be by far the largest economy in the Eurozone but it surely cannot
carry the rest of the economic bloc without some respite and German
tax payers will punish the government severely if this situation
isn't improving by the next election. I have a feeling the sword of
Damocles is swinging ever lower for the Euro and if you look at the
countries mentioned above, the first cut will be felt in one of those.
The US Dollar had a less exciting day. Traders were back from their
Bank holiday and perhaps still a bit bleary eyed but the improvement
in the empire state manufacturing index and sanguine housing data were
not enough to cause any major move in the US Dollar which actually
weakened against the Euro and Sterling.

Elsewhere, the Bank of Canada's decision to leave the base rate on
hold at 1% was greeted with a selloff in the currency. The BOC made it
quite clear that there was little chance of an early hike in interest
rates and spoke in very measured tones about the uncertainty of the
global recovery and the damage that the very strong Canadian Dollar
was doing to export income. Sterling failed to push above recent
ranges against the Canadian Dollar but is near the top of the range
this morning.

The Australasian Dollars are very mixed as traders try to weigh the
advantage they hold in terms of interest rate yield against the risks
posed by the flood related drop in Australian output and the slowdown
that the Chinese authorities are trying to induce. At the moment, the
Aussie and Kiwi dollars are managing to avoid a collapse but that is
not to say it won't happen. I tend to think we will see another
period of strength in these currencies before any major decline. NZ
inflation data is due for release this evening and any reading above
2.3% will be positive for the NZ Dollar because the reserve Bank of
New Zealand has the capacity to raise interest rates to temper
inflation; a luxury the Bank of England seems not to have.

And finally, if you have plans to tell your loved one how you feel on
St Valentine's Day, just don't take him/her to Iran for a romantic
weekend to do it. Iran has banned production of Valentine's Day
cards and gifts because it sees the day as symptomatic of the spread
of western culture. Now of all the decadent things that western
culture has inflicted on the world, you would have thought something
as innocent as a day devoted to the celebration of love would be
exempt from Iranian bile but perhaps not. Or perhaps they just missed
the point.

!! Currency - GBP/Australian Dollar !!
It isn't hard to see the main influence on the Australian Dollar
right now. There are billions of gallons of it all over Queensland in
places that just should not be wet. Estimates of A$13 billion cost to
the economy, of a drop in economic growth of as much as 1% and of
months and perhaps years of clearing up are not good for anyone.

Sadly, such bad news was bound to have a negative impact on the
Australian Dollar and that is precisely what we have seen. Short
term, I think we have seen the high in the Sterling - Australian
Dollar rate but in the longer term, I do believe we will see another
test of A$ 1.60 and perhaps a break above that level. If you need to
buy Australian Dollars, I guess it just depends on your time frames
and your attitude to risk as to whether you wait for the hoped for
rally or you cut the risk and trade here.

!! Currency - GBP/Canadian Dollar !!
The Bank of Canada decided to leave the Canadian Base rate alone at
1.0% when their monetary policy committee met today. In the statement
they issued, they commented on the improving tone of the economy but
warned that the strength of the Canadian Dollar was undoing all the
positive effects of increasing exports and rising commodity revenues.

You could perhaps say that their commentary was less negative than
previous reports but it certainly wasn't positive and still had the
foreboding air of a central bank that is not yet convinced the
economy is out of the woods. The Canadian Dollar weakened on the
announcement and remains a tad weaker at the close of business in the
UK. Wednesday brings the more detailed Monetary Policy report from
the BOC so we will be expecting a little more volatility in the next
48 hours. Obviously, events in America will also have an effect and
the floods in Australia are directly impacting on the value of
commodities, so eye sin the back side and top of your head would be
very useful. Alternatively, let us know what you need to achieve and
we will do the watching for you.

!! Currency - GBP/Euro !!
The reports I have been writing on the Euro are a bit like stuck
records because all the same influences are still in play. Debt
ratings, fears over the peripheral Eurozone states, pressure on the
European Central Bank to tighten monetary policy and the disparity
between outstanding German economic performance and the more
laggardly performance of the rest of the Eurozone are all factors in
the minds of traders. Nevertheless, the fact that China and Japan
have both supported recent bond auctions within the EZ does lend the
Euro an air of solidity which it probably doesn't deserve. The Euro
is at the weaker end of its range against the Pound but doing rather
better against the struggling US Dollar and that is a situation that
could continue if we fail to see the claims of an improved EU
cohesion over debt management followed through into solid action. The
fact that UK inflation pushed to 3.7% on the CPI measure failed to
boost Sterling because the Bank of England cannot afford to hike
interest rates as they perhaps should and would do if inflation were
this high in a normal market environment.

!! Currency - GBP/New Zealand Dollar !!
Queensland's plight and China's slowdown are the major themes for
the New Zealand Dollar because NZ exports heavily to both countries.
Any drop in demand is bad news for the Kiwi economy. So it is not
perhaps so surprising that the NZ Dollar has, at long last, finally
stepped back from a pattern of unabated strength. Weakness in the US
Dollar is generally a sign of strength in the Australasian currencies
and, you have to consider that, were it not for the fall in the value
of the US Dollar, the Sterling - NZ Dollar rate would be higher.

Sadly, I think we have to view this bounce in the Sterling - NZ
dollar rate as a short term correction rather than a permanent change
of direction. The poor demand issues are now factored in and yet the
GBP-NZD exchange rate has still not managed more than a 7 cent rise
from the December low. Quite what it is going to take to change the
direction f this pair is very uncertain but for the short term,
taking advantage at NZ4 2.05 and above is the obvious choice.

!! Currency - GBP/US Dollar !!
Positive reaction to the EU bond auctions and nervousness over the
disparity between consumer and manufacturing recovery in the US are
the major themes in the Sterling - USD exchange rate. From a UK
perspective, we are seeing constrained support for the Pound without
the follow through that an exuberant market would deliver. From a US
Dollar perspective, we are seeing improving manufacturing and
industrial numbers but nothing anywhere near as positive from the
labour market or retail end. Unless US consumers start to feel
confident again, the US economy is always going to struggle to
recover. Nevertheless, the US Dollar is the most liquid currency in
the world and it takes a lot to persuade traders to sell the US
Dollar for any sustained period. Sterling struggles to make any gains
above $1.60 and the Euro struggles above $1.34. While those
resistance levels cap these exchange rates, we have to respect then
as market toppers and trade accordingly.
Source: Fxstreet.com