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Forex: Monetary tensions

Finance ministers and central bank governors of the G20 nations are meeting in Asia over the weekend at a time when monetary policy is becoming ever more crucial for FX markets. In the early part of the financial crisis, everyone seemed to be moving in the same direction, in other words rates moving down. Now, we’re seeing much greater divergence, both in expectations and actual rates, which is causing more trends in currencies. The ECB has been easing and may do more next month. Expectations on the UK have shifted dramatically over the past 6 months towards earlier tightening. It is also causing more tension, especially in emerging markets as the Fed embarks on tapering the pace of its bond purchases, which was at least initially strengthening the dollar and putting pressure downward pressure on the more vulnerable emerging market currencies.

The recent weakness in US data has given emerging market currencies some respite, with those under most pressure into the end of January having staged a decent recovery, but we are very early along the road along of the removal of very simulative measures from the US. As such, the current situation is not likely to remain and more pressure on emerging market currencies is going to be seen in the coming months. For today, sterling is focused on retail sales and public sector borrowing data at 09:30, with sales seen falling after the very strong December. US data is second tier, with existing home sales released at 15:00 GMT.

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