Euro Weaker On Scandal, Ahead Of ECB Rate Powwow

USD

The dollar strengthened against most counter-parts on Wednesday as markets became risk averse which stimulated demand for the greenback's safe-haven qualities. Against the euro it strengthened after continued calls for Prime Minister Rajoy to resign over allegations of misappropriation of party funds, and in Italy the possibility that the country's oldest bank could be found guilty of false accounting threatened to destabilize the financial system. The dollar traded unchanged versus the pound and the yen as little extra news came out to impact on either. Sterling moved in a narrow range as traders stood aside ahead of the BOE rate meeting tomorrow. On the data front, it was a light day but MBA Mortgage Applications rose by 3.4% from -8.1% previously in the week ending 1st February.

EUR

The euro fell on Wednesday amidst political uncertainty ahead of the ECB rate meeting on Thursday with speculation growing that the central bank might announce new, possibly looser policy measures. In Spain Mariano Rajoy continued to face pressure to resign and in Italy revelations about Banco Monte Dei Paschi di Siena Spa – the world's oldest lender – which has been accused of using derivatives to cover up losses in the financial crisis of 2008 also weighed; finally, Silvio Berlusconi threatened to draw neck-and-neck in polls with his rival Bersani ahead of the election on the 24th and 25th. On the data front, December Factory Orders fell by a worse-than-expected -1.8% y/y when a -1.2% drop had been forecast. This was neutralized, to a certain extent, however, by a rise in the m/m result to 0.8% when only a 0.7% figure had been expected, from a negative print previously.

GBP

The pound traded in narrow ranges on Wednesday against almost all major counterparts although it was slightly up against the euro which fell under pressure caused by a conjunction of political and banking scandals, and the proximity of the ECB rate meeting on Thursday. The U.K also has its rate meeting tomorrow, however, the BOE is not expected to lower interest rates or switch on the printing presses. The OECD published a report on the U.K on Wednesday in which it called for more pro-growth strategies to compliment the fiscal restructuring. It suggested using looser monetary policy, which may have increased expectations that the BOE could surprise us with a policy change tomorrow – although overall it still remains unlikely this soon.

JPY

The yen ended Wednesday, hardly changed from how it started, except that is gained slightly versus the euro which dominated headline's and weakened across the board. A banking scandal in Italy and the potential for a major political upset in Spain - where the credibility of the political class has already been savaged - led to a fresh bout of uncertainty for the stability of the euro-zone. Nevertheless the rise in risk aversion was not sufficient to catapult the yen higher, as has been the case in the past. This may have been because investors were focused on the government's extraordinary single-mindedness in dealing with Japan's deflation. with fresh reports focused on who and when Shirakawa's successor will take the helm. It is certain that whoever they are, they will be pro-easing, but the month-long delay before his successor is announced could slow-down the yen's current decline.