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Is the British pound rally going to resume?

Currencies Direct February 18th 2014 - 2 minute read

With the US markets closed for Presidents’ Day holiday
yesterday, the sentiment towards the greenback continued to be
driven by retail sales and industrial productions released in
previous sessions. The major move in the foreign exchange market
was in the British pound, which climbed to a fresh 4 year high
against the greenback at the start of the Asian trading session. As
the European markets opened, the rally fizzled. The reversals in
gains were not caused by economic data but it was the result of
profit taking. The market will now look very closely at reports out
of the UK today to see if the rally can continue.

 Today’s inflation report may be softer but employment and
retail sales should have improved in the month of January. The
favourable movement in the British pound was triggered by the
latest BoE Inflation Report, in which the central bank abandoned
its unemployment rate threshold and upgraded its 2014 growth
forecasts. Many analysts think that the Bank of England wouldn’t
have made these changes if the economy wasn’t gaining momentum and
investors will be looking for hawkishness from the BoE minutes out
on Wednesday and also for some healthy economic reports starting
figures out today.

Japan data released yesterday showed its economy grew well below
expectations at the end of last year. Official figures show the
economy expanded by 0.3 per cent between October and December 2013,
significantly down on the 0.7 per cent that economists had hoped
for. Weak export growth is being blamed, but private consumption
and business investment were also worse than expected, raising
questions about the limits of Abenomics – Prime Minister Shinzo
Abe’s unprecedented stimulus plan.

Meanwhile in other news out of the Eurozone, Matteo Renzi
was asked to form Italy’s next government. In the next few days,
the centre-left leader will need to agree a formal coalition deal
with the small centre-right NCD party to secure a governing
majority and name his cabinet before seeking a formal vote of
confidence in parliament later this week. This puts him on course
to become Italy’s youngest prime minister since the war.

In the data calendar today the main events are the ZEW indicator
in Germany, CPI in the UK and the NAHB housing market index and
Empire State Manufacturing Survey out of the US.

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