Sterling Falls On E.U Membership And Growth Fears

The dollar traded mixed on Monday, strengthening at first on increased safety flows following the release of worse-than-expected Industrial Production data from the euro zone, which continued to show the region under stress. Risk appetite was also hit scepticism of China's reent stellar trade data which questioned whether the figures were true. The dollar weakened, however, after Fed's Evans talked up the case for more monetary easing if required, arguing that inflation should not deter policy-makers as it could quickly be brought under control. Barak Obama held an impromptu press conference on the fiscal cliff at which he argued for a raising of debt ceiling and bi-partisan solutions to reducing the deficit.

EUR
The euro traded higher Monday, rising against European majors such as the pound and the Franc after the release of data from the Bank of Spain which showed Spain's borrowing fell for the fourth consecutive month to 313.11bn in December, down from 340.84 in the previous month and from a peak of 411.65bn in August, indicating the struggling peripheral was less dependent on ECB money. The single currency pared some of its gains however, after data revealed a larger-than-expected fall in Euro-zone Industrial Production of -3.7% y/y in November when a recovery to -3.1% from -3.3% previously had been expected. Month-on-month it also fell by a greater than expected amount of -0.3% when a rise of 0.2% had been forecast. The single currency recovered in the evening, however, after the dollar weakened on easing fears.

GBP
The pound weakened more than most major currencies on Monday after growth fears and doubts about the U.K's membership of the European Union weighed on the currency's outlook. Some of the weakness may have been due to follow-through selling as a result of the poor industrial and manufacturing data released on Friday. David Cameron's recent comments about 2013 looking set to be a difficult year may also have impacted negatively. The prime minister is under increasing pressure to call a referendum on E.U membership. While it remains unlikely that the U.K will exit the community a growing number of voters want out, and Cameron is attempting instead to renegotiate the terms of the relationship.

JPY
The yen fell to a new low and -- although it recovered -- came under considerable pressure after the news that the prime minister Shinzo Abe had said the current inflation target of 1.0% was too low and should be doubled to 2.0%, implying the government was planning to use aggressive stimulus to artificially increase inflation, which would negatively impact on the yen. He also said that he wanted the next governor of the BoJ -- elected in May -- to be someone who takes “bold monetary policy steps” and was sympathetic to the administration’s way of thinking. It was also reported that the government was considering selling 50tr yen to reduce the value of the currency. Tonight sees the release of Money Stock, both M2+CD and M3, which are expected to show 2.1% and 1.9% increases y/y respectively.