ECONOMETER

Slightly better market sentiment allowed equity markets in the US to close higher in the wake of earnings helped too boost sentiment but overall direction remains limited ahead of a plethora of earnings releases over coming days and more immediately the European Central Bank and Bank of England meetings today.

Fed speakers will also be watched closely, while bond auctions in Spain and Italy will be another key influence for Eurozone markets. Meanwhile, the VIX ‘fear gauge’ rebounded slightly but remains at a low level while the USD index continued its ascent and is likely to continue to remain firm.

The ECB and BoE are set to leave policy unchanged today but this will not prevent both EUR and GBP from losing ground against the USD. The principle risk to GBP revolves around the UK economy. Weaker data releases have restrained GBP both against the USD and EUR.

Given the likelihood that growth will not recover quickly this will continue to act as a weight on GBP in the months ahead. Only the fact that the Eurozone economy will look even weaker will allow GBP to appreciate versus EUR while relative US economic outperformance will ensure a relatively softer GBP versus USD.

The breach of GBP/USD’s 100 day moving average level around 1.6061 is a trigger for a steeper decline. Conversely EUR/GBP may register some further short term upside but technical indicators suggest a relatively flat picture for the currency pair over coming weeks.

It is clear that the Japanese authorities have a fresh determinism to weaken the JPY as reflected by the news that Japan purchased bonds issued by the European Stability Mechanism. Additionally pressure on the Bank of Japan to implement a 2% inflation target has not eased, with Prime Minister Abe continuing to highlight the prospects of a joint accord between the government and BoJ.

Reflecting these factors and the higher starting point for USD/JPY I have revised my forecast and now look for the currency pair to end 2013 at 92.00 versus 85.00 previously. It will not be a one way bet for the JPY, however. Its drop against the USD looks excessive especially as it has largely been driven by expectations rather than actual policy change. There is scope for disappointment should policy be less aggressive than hoped for.