Countdown To UK And US Minutes

Sterling fell back heavily yesterday following the weaker CPI data (2.4% annually against expectations 2.6%) which shows inflation risks declining, though much of this is due to weaker oil prices instead of reduced domestic inflation pressure. The market has taken this as a sign that further quantitative easing is more likely, though the minutes today are more likely to see fewer members of the committee voting for further easing. Mervyn King himself voted for an additional GBP25bn at the previous meeting, but given the quarterly inflation report he presented with reduced inflation pressures and improving growth forecasts, we could easily see a move from 6-3 to 7-2 in favour of no change.

The minutes are published at 9.30 and any change in voting away from QE should see GBP supported and reversing some of the losses from yesterday. Retail sales will also be a focus, but look likely to be close to expectations. Retail sales published at the same time are expected to come in 2% annually.

Today’s Eurozone data is likely to take a back seat compared with the UK and US releases, though the current account data has shown steady improvement in recent months, with the current account in surplus by EUR135bn in the 12 months to February. Even though much of the improvement relates to weak Eurozone demand it will likely be seen as mildly supportive, with the majority of any moves today likely to be driven by Bernanke.

From the US data today, the testimony by Bernanke will be most closely watched. The key question will be how dovish the federal reserve chairman will be relative to recent comments by other members of the FOMC that we are approaching an end to QE3, with tapering expected to start over the summer. Any comments from Bernanke suggesting that quantitative easing will be scaled back in the near term will certainly be US dollar positive. The more likely outcome is that the joint economic council are told that the economy is improving gradually though there is no plan to reduce the asset purchases in the short term. The FOMC minutes at 7pm are likely to reinforce the message given by Bernanke and unlikely to hold any new information.

The Bank of Japan kept its policy of massive quantitative easing steady, whilst upgrading the economic growth outlook. Effectively Japan is the only major economy currently undertaking fresh QE, with the UK and US holding steady and the Eurozone effectively withdrawing QE as volumes are being slowly repaid week by week.