Currencies: What's in store this week?

Thinner trading volumes due to the US market holiday are not anticipated to have any sizeable effects on currency markets this week as the credit events from last week and over the weekend in Europe direct market actions.

**Pound**

The decision by the Bank of England to keep interest rates unchanged but highlight their quantitative easing timeline in last week's policy announcement has led to analysts pricing in the potential for further liquidity measures after February, and although the timing of such action is still uncertain the pound is seeing downside pressures are a result of these expectations.

There are a number of economic data releases scheduled for this week that need to be considered, most notably the release of CPI inflation figures on Tuesday. Consumer price pressures are expected to have eased in December and will thus alleviate some concerns of imminent policy action by the UK central bank to support the British economy.

Likewise the release of UK employment and retail sales number later this week will be scrutinised in very much the same manner.

Overall investor concerns being driven by the European debt crisis and its effects on the stability of the UK economy must be kept in mind as the effects of movements in EUR/USD and safe-haven demand for the dollar will continue to put negative pressure on the value of the pound throughout this week. Positive economic data releases and profit-taking on euro positions will no doubt create opportunities for sterling to make intermittent gains over the course of the week.

**Euro**

The credit rating downgrades and a possible total collapse of debt restructuring negotiations for Greece have kept the euro trading lower as the week begins and even though thinner trading volumes are affecting the euro, these are serving only to maintain ranges for the single currency versus the dollar.

Risk appetite and credit rating will likely continue to be an ongoing theme throughout this week as Moody's today issued a credit warning for France following the S&P downgrade on Friday. France's downgrade had been priced into the market to some degree prior to Friday's event, but should other agencies follow suit the pressure that an increase in French borrowing costs would have on the eurozone as a whole would result on a vast array on market concerns.

One effect that has already been highlighted is the credit rating for the eurozone bail-out fund, EFSF, which has a AAA rating based primarily on the German and French ratings. A drop in the EFSF rating would considerably increase concerns of a euro 'collapse' in the coming months, and even though such a collapse isn't necessarily likely over the short term, the perception will have a negative effect on the single currency.

As with last week, positive economic data releases in Europe could create profit-taking opportunities that could allow for some euro appreciation.

**Dollar**

Putting aside the ongoing influence of safe demand, which is still expected to provide support for the dollar, the US economy is increasingly being seen in a positive light.

Employment data released earlier this month showed an improvement in the US jobs market and since then other economic data releases have further supported the view of a recovery economy in the United States.

There is a market holiday in the US today that makes for a slightly shorter trading week, but there are a number of data releases that need to be taken into consideration. The Federal Reserve Bank is not meeting to discuss monetary policy until next week but markets will certainly be aware of this pending event over the next few days.

US producer and consumer inflation numbers will be closely watched to see if these would result in any changes to overall expectations for policy going forward, in addition weekly jobless claims data and housing figures will not be overlooked.

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