Sterling Slips On Stimulus Surprise Hopes From Bank Of England

China’s bounce-back from its soft landing in the middle of 2013 has continued apace with both imports and exports cracking higher in December. Exports rose by 14.1% compared to a year earlier, which was the fastest for 7 months. Imports also rose by 6%, suggesting that industry within the world’s engine room is once again picking up nicely.

AUD was the main beneficiary of this upside surprise with AUDUSD breaking back above the 1.05 mark in short order. Asian equities also kicked higher as well and the general “risk-on” atmosphere supported EUR, GBP and others versus the haven currencies of USD and JPY.

Yesterday’s session had started off poorly with the UK trade balance moving closer to balance following an increase in exports although, if you remove the “financial services” aspect of the figures it would have showed a manufacturing industry that needs some serious help. One important note on the numbers was that while exports did increase the retargeting of UK PLC isn’t working; UK exports increased to EU countries in November while they fell in relation to non-EU countries. Now, I will take increased exports all day long but extending into growth markets has to be UK business’s priority. Cameron’s statement at PMQs yesterday that the Conservatives have increased exports to China “by 50%” may well be true, but it’s not enough at the moment.

Elsewhere we saw some poor industrial numbers once again from Germany. Production rose by 0.2% in November against an expectation of a 1% increase with big falls in consumer goods and energy the key weakness. It seems almost guaranteed that Q4 of 2012 will be the weakest for Germany since Q1 of 2009. Euro did wander lower after the number.

Sterling also came lower against all its crosses as traders positioned themselves for a surprise from the Bank of England. Now, we don’t get any comment from the Bank of England today so the only indication of a policy change would actually be a policy change in the form of an increase in asset purchases or an interest rate cut. We believe this is unlikely to happen in the month before a Quarterly Inflation report (due mid-February). We therefore expect sterling to bounce back slightly versus its crosses in the event of a policy hold.

The ECB are also expected to hold policy today with the press conference closely eyed for signs that patience may be running out with governments that don’t submit themselves for bailout (here’s looking at you, Madrid). It is likely the decision to hold rates was unanimous, however, and therefore it will be comments from Draghi that determine the market’s reaction.

As he starts speaking we of course get the weekly reading of US initial jobless claims with hopes high that the recovery in the US jobs market can continue apace.

Our next webinar is due today at 14.00 GMT and with the ‘fiscal cliff’ out of the way for at least a couple of months we turn our attention to what else could influence rates through the 1st quarter. We’ll take a look at the Italian elections, a possible downgrade of the UK’s credit rating and the increased chances of a Spanish bailout alongside a rundown of our expectations and predictions for the next year.