Forex: Tuesday's review

The dollar dropped against the yen as Treasury yields fell on expectations President Barack Obama will propose a five-year freeze on non-security spending.

Obama will outline the freeze in U.S. spending in the State of the Union address tonight in Washington, according to a person familiar with the situation.

Sterling tumbled on Tuesday as a surprise contraction in fourth-quarter UK GDP raised fears over a double-dip recession and doused expectations that the Bank of England would raise interest rates to fight inflationary pressures in the British economy.

Figures showed the UK economy shrunk 0.5% in the last three months of 2010, far worse than expectations for growth of 0.5%.
Howard Archer at IHS Global Insight said it was a stunningly bad outcome, far worse than even the most pessimistic of forecasts. He said even allowing for a very substantial hit to economic activity from December’s severe weather, the news was extremely disappointing and worrying.

EUR/USD: the pair become stronger in around $1.3700.

GBP/USD: on results of yesterday's session loss of pound against dollar have made about 170 points.

USD/JPY: the pair shown low in the field of Y82.00.

UK data at 0930GMT includes the minutes of this month's MPC meeting as well as BBA Mortgage Approvals data for December. Speaking this week, MPC member Sentance made it clear he was sticking with his view that rates should be raised, while Adam Posen, in an interview last week, signaled that he would also maintain his opposed view that QE should be raised, so the question appears to be if the recent 1-7-1 voting pattern changes in light of the higher-than-expected CPI data.

US data starts at 1200GMT with the weekly MBA Mortgage Application Index. US data continues at 1500GMT, when the pace of new home sales is expected to rise to 300,000 at an annual rate in December, still very low relative to a year earlier. This is followed at 1530GMT by weekly EIA Crude Oil Stocks data.

The much awaited FOMC decision is due at 1915GMT.

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