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Forex: Watching sterling

Looking at the net change of the dollar index, the dollar seems to be just about holding its head above water so far this year.  Yesterday’s further downward revision to US GDP for the first quarter was a further blow to the notion that differing policy cycles would provide support through most of 2014. From here, it’s a case of the durability of the recovery from the Q1 weakness, but also the extent to which the dollar is able to stand apart from the crowd. Against the euro, that’s still possible given the easing put in place by the ECB earlier this month. Against sterling it’s going to be harder, given the indication from the BoE that the first tightening move may come earlier than previously thought.

On sterling, we could get a better steer on this today, with the release of the results of last week’s financial policy committee meeting. Before the financial crisis, the central bank was pretty toothless when it came to financial stability issues. Since then, new powers are designed to rein back financial excesses before they impact the economy. There are thoughts this could well happen today, with some restriction on mortgage lending or possibly capital requirements against it. If seen, these could well soften the currency, on the basis that such measures would be seen as making an interest rate increase less likely.  Details are expected to be announced around 09:30 GMT.

Overall, FX has been steady overnight, but cable has nudged upwards the 1.70 level again, with the Aussie also finding some support above the 0.94 area. US claims data the main focus later on, together with income and spending data, but no major changes on the dollar tone anticipated.

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