Kathy Lien | Jan 09, 2013 11:32AM ET
The euro and British pound are trading lower this morning against the U.S. dollar ahead of Thursday's monetary policy meetings. European currencies continue to move to their own beat as commodity currencies rebound alongside equities. In fact, the GBP sold off despite the strong performance of the FTSE, which climbed to its highest level since 2008 today. While the underperformance of the EUR and GBP can be attributed to weaker than expected economic data, both the U.K. trade balance and German industrial production improved in the month of November compared to October. The only explanation then is that euro traders are still worried about potential caution from the ECB.
What Will Draghi Say?
Both central banks are expected to leave monetary policy unchanged but as usual, comments from ECB President Draghi at the post monetary policy meeting press conference could save or sink the euro. Before we talk about what Draghi could say, lets first take a look at how the U.K. and Euro-zone economies performed since the last monetary policy meeting.
U.K. -- How Has The Economy Performed Since Last BoE Meeting?
According to table below, there has been slightly more deterioration than improvement in the U.K. economy over the past month. While retail sales in November stabilized, consumer confidence fell steeply in December as spending growth weakened. This suggests that weaker consumer spending could weigh on growth in the fourth quarter. Inflationary pressures also declined as the labor market and housing market held steady. Improvements in the manufacturing sector were offset by a deeper contraction in the service and construction sectors. Overall, market indicators such as the FTSE and U.K. bond yields increased but this may not be enough to make the central bank less pessimistic. The last time the BoE met, MPC members voted 8 to 1 to keep their asset purchase program unchanged. The lone dissenter was David Miles who has consistently voted for more Quantitative Easing. For the BoE, their challenge is to manage monetary policy during a period of stagnant growth and rising inflationary pressures. While inflation has eased over the past month, energy companies are expected to raise prices. In December, the central bank was less concerned about international conditions and more worried about the high level of the GBP/USD - we don't expect these fears to change. However we'll hear none of that tomorrow because the BoE does not provide any details until the minutes are released 2 weeks later when monetary policy is left unchanged. As a result, the BoE meeting should be a nonevent for the GBP.
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