Talking Points
•    Japanese Yen: Benefitting From the Rise in Risk Aversion
•    Pound: BoE Maintains Current Policy, Keeps Asset Purchase Under Review
•    Euro: ECB Holds Interest Rate at 1.00%
•    US Dollar: Factory Orders, Treasury Secretary Geithner on Tap

British Pound Pares Decline as BoE Suspends Asset Purchases, Euro Holds Rate at Record Low

The British Pound broke out of its recent range and slipped to a fresh month low of 1.5806 during the overnight trade, and the currency may continue to trend lower throughout the remainder of the week as investors scale back their appetite for risk. Meanwhile, the Bank of England held the benchmark interest rate at 0.50% and maintained its asset purchase target at GBP 200B, but went onto say that further purchases could be warranted as policy makers continue to see a risk for a protracted recovery.

Moreover, the central bank said household spending appears to be improving, while business investments is contracting at a slower pace, but went onto say that price growth has risen ‘sharply’ above the near-term target. At the same time, the MPC expects inflation to fall back below the 2% target for some time during the course of the year, and sees a ‘gradual’ recovery in the region as the expansion in monetary and fiscal policy continues to feed through the real economy. Nevertheless, home prices in the U.K. grew less-than-forecast in January, with the Halifax index increasing 0.6% from the previous month amid expectations for a 0.7% advance, while the annualized rate expanded 3.6% after gaining 1.1% in the three-months through November.

The Euro extended the previous day’s decline and reached a fresh yearly low of 1.3826, but we may see a corrective retracement in the exchange rate as the daily RSI continues to push deeper into oversold territory. Meanwhile, the European Central Bank held borrowing costs at the record-low of 1.00% this month, with the EUR/USD failing to react to the announcement, but we are likely to see increased volatility in the exchange rate as President Jean-Claude Trichet is schedule to speak at the central bank press conference at 13:30 GMT. At the same time, a report by the German Economy Ministry showed factory orders unexpectedly decline 2.3% in December after rising a revised 2.7% in the previous month, while demands grew at an annualized pace of 8.4% from the previous year amid forecasts for a 9.6% expansion.

U.S. dollar price action was slightly mixed overnight, with the USD/JPY crossing back below the 20-Day SMA (90.77) to reach a low of 90.71, and we may see the greenback continue to appreciate against higher-yielding currencies as equity futures foreshadow a lower open for the North American market. The economic docket for the world’s largest economy is fairly light for today, but market participants are expecting to see a 0.5% in December factory orders, which is likely to encourage an improved outlook for future growth. At the same time, Treasury Secretary Timothy Geithner is scheduled to testify in front of the Senate Budget Committee at 15:00 GMT on the proposed budget for 2011, while Kansas City Fed President Thomas Hoenig, who dissented against the FOMC’s statement to keep borrowing costs at the record-low for an ‘extended’ period of time, will speak to the Oklahoma Bankers Association at 19:00 GMT.

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