Sterling slips in the hours before the minutes

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With the Greece deal out of the way the market is now able to look at other things, whether this will end up as a positive for the pound will have to remain to be seen however. I certainly don’t think it was coincidence that the pound had a rough session the day after the Greek deal was done. It certainly didn’t deserve it after some rollocking public finance figures. Yesterday’s PSNCR figure showed a surplus of £10.7bn in January on higher tax receipts, compared with an expected number of around £8bn. This will lead to people expecting some set of giveaways or tax cuts by the Chancellor come the Budget in March although we think this is unlikely and, were it to happen, would be a political decision more than an economic one.

The weakness in the pound could have come from expectations that the vote on further QE at the Bank of England’s latest meeting was not unanimous, and that some may have wanted more than the £50bn that the committee went for. The market was pretty evenly split between the two figures and the level of additional dovishness will be key to the pound’s prospects.

Commentators were quick to come to the conclusion that there would be no more QE forthcoming following the recent inflation report but we think that this is hasty. Although the inflation expectation was revised higher we think that to rule out further asset purchases as a result is incorrect; another wobble in Europe, while less likely in the short term due to recent policy, will cause the Bank to act due to the UK’s dependence on European trade.

Away from Greece we also have the publication of the latest round of PMIs from the Eurozone. A mixed picture is expected with further evidence of a two-speed Europe likely. Germany, France and the Eurozone are expected to post improvements although French manufacturing will in all probability just slip above 50.0. These are not our concern however, it will be the figures from Spain and Italy where the real pain or pleasure will lie.

China’s manufacturing sector shrank for the 4th month in a row in February it seems. The number is also the highest in four months as confidence returns having been dealt a blow by fears over the European economy and a natural slowing due to the Chinese new year celebrations. The recent reserve requirement ratio cut will help matters going forward and, as we mentioned on Monday, we expect more of these through the year. Asian markets moved higher on the number and Europe has followed this morning.

10am brings us European Industrial New Orders and although a volatile series will be interesting to see whether the near 8% fall in December has been erased

Indicative Rates Sell Buy
GBPEUR 1.1903 1.1932
GBPUSD 1.5760 1.5786
EURUSD 1.3222 1.3244
GBPJPY 126.32 126.62
GBPAUD 1.4800 1.4828
GBPNZD 1.8931 1.8960
GBPCAD 1.5720 1.5749
NZDUSD 0.8315 0.8337
GBPZAR 12.17 12.22
USDZAR 7.7162 7.7560
GBPPLN 4.9718 4.9986
EURJPY 105.96 106.22

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