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Despite the euro successfully penetrating 1.30 this morning, the pound has again failed to keep pace with the single currency. Most telling is that cable is essentially unchanged today, despite widespread losses by the dollar against other major currencies. Weighing on the currency is increased speculation that the MPC minutes, to be released on Wednesday, will reveal that the committee is minded to engage in a further round of asset purchases before too long. With the way the economy is performing right now, implementation of more QE is likely sooner rather than later. Q4 GDP data, also set to be released tomorrow, could well show that the economy contracted; indeed it is perfectly possible that the economy has lapsed back into recession. Helping the doves on the MPC would be growing evidence that inflationary pressures are moderating; last month’s retail sales figures showed that prices (ex. fuel) have barely changed over recent months. Also, a survey conducted by Ernst & Young showed that profit warnings in the final quarter of 2011 jumped by over 70%.
EUR/GBP has been edging higher over the past two weeks, to 0.8350 currently from a low of 0.8245. Euro shorts are still very considerable - although the direction of travel is towards closing them out - while GBP shorts are increasing. If the MPC gives the green light to further asset purchases, then the currency may not respond too positively.
