FX news and analysis 22nd Feb

USD

 The dollar rose on Wednesday after monetary easing fears weighed on the outlook for the pound and the yen whilst the euro lost ground following below-expectations data. In the U.K the BOE published the minutes from its February meeting which showed more easing likely after 2 board members voted for an even bigger 75bn rise in quantitative easing to the 50bn actually endorsed. The recent drop in Japanese GDP figures and doveish rhetoric from BOJ governor MasaakiShirakawa also increased easing fears in Japan. Euro-zone PMI data meanwhile was overall down which weighed on the euro. Risk appetite was also still struggling from renewed scepticism about the Greek economy's ability to sustain its debt burden even after the bailout. Data may have weighed on the dollar after it showed a slowdown in housing sector. Existing Home Sales rose only 190k to 4.57m when expectations had been for a 270k increase, whilst MBA Mortgage Applications fell by -4.5% when they had fallen by -1.0% in the previous week.

EUR

The euro consolidated on Wednesday with slightly bearish downside bias caused by disappointing PMI data for February, which revealed a slowdown in the economy of the region. The data showed a fall in the Euro-zone Composite PMI to below 50 raising fears of a recession and increasing the possibility the ECB might lower rates. Manufacturing PMI rose to only 49.0 versus expectations of a rise to 49.4, from a previous print of 48.8. Services PMI fell to 49.4 versus 50.6 previous and 50.4 in the month before. German PMI mirrored the euro-zone data although it remained above 50, and French was mixed with Services PMI falling to 50.3 versus 52.0 expected and 52.3 previous but Manufacturing actually rising to above 50. Other data showed Italian CPI remaining unchanged at 3.4% and Euro-zone Industrial New Orders falling less than expected to -1.7% in December when -2.8% had been expected. Tomorrow's docket looks dominated by the German IFO business sentiment survey which is expected to show a rise in positive sentiment.

GBP

  The pound weakened considerably on Wednesday following the publication of the Bank of England February rate meeting Minutes which surprised investors by the extreme doveishness of some of the board members and stoked fears of further rounds of QE occurring in the future. The minutes showed that 2 out of the 9 board members actually voted for a 75bn rise in the bank's asset purchases - more even than the 50bn actually made policy. Adam Posen and David Miles were the two members who voted for 75bn more easing at the February meeting. Sterling fell because markets had positioned themselves to expect a few members to have voted against stimulus altogether when in fact the opposite happened. The strong bias towards more easing by board members increased growth fears as they were thought to be indicative of a policy reaction to an economic slow-down, despite recent data and commentary pointing to a gradual recovery hypothesis.

JPY

The yen continued to fall on Wednesday as a result of economic fears, a drop in safety demand and increased concerns that the the Bank of Japan would institute more quantitative easing to try to kick-start the economy and reach its target for inflation of 1.0% by 2013. The latest economic concerns centred around the price of oil and its impact on the Japanese economy which has become dependent on oil and gas imports to fuel its economy since most of the nuclear power plants were closed after the Fukushima disaster. Recent rises in the price of oil and lessening demand for Japanese exports in Europe – partly exacerbated by the strong yen - have led to deficits in the trade balance, which is reducing the current account surplus. It has been estimated that a 30% rise in fossil fuels would wipe out Japan's Current Account surplus for 2012 leading it go begging for money from the markets. With the highest level of public debt in the world (198% of GDP) – higher even than Greece Japan could provide the next big debt story, and the yen could be the next best shorting opportunity of the year.