This week, eyes will track euro area`s fourth quarter growth data, European finance ministers meeting and the Group of 20 meeting, while in the U.K. the BOE quarterly inflation report is expected to grab attention.
Starting first with the euro area, after the worrying comments from ECB President Mario Draghi last week investors will wait for euro area Q4 GDP to get confirmation the economy is still weak despite the improvement seen in the most recent data.
The 17-nation region probably contracted 0.4% in the final three months of 2012 from -0.1% in the third quarter, dragged down by 0.5% contraction in the region`s biggest economy that reported 0.7% growth in 2012 as a whole.
Moreover, euro area finance ministers will meet on Monday to review the latest developments in the debt crisis and the progress on the 17.5 billion euro bailout for Cyprus.
Finance ministers and central bankers from the Group of 20 nations, thereafter, will gather in Moscow on Feb. 15 and 16, where they may discuss currency wars after the recent devaluation in the yen which plummeted to 33-month low versus the dollar last week.
There are downside risks to inflation “stemming from weaker economic activity and, more recently, the appreciation of the euro exchange rate,” Draghi said last week.
Also, a debt auction in Spain and Italy is likely to be carefully watched after last week`s bond sale in Spain witnessed a rise in yields.
In the U.K., the main concentration will be on inflation with the release of the BOE`s quarterly inflation report and inflation data for Jan., noting that Britain is the only country among major economies still suffering from inflationary pressures.
Inflation remained at 2.7% in December on higher gas and electricity bills, raising expectations prices would remain above the BOE`s inflation target this year, where the Bank of England has forecast that inflation will drop gradually this year.
Expectations are in favor of seeing the rate lingering at 2.7% in the year ended Jan., according to the CPI measure.
Inflation will probably exceed 2% in 2013 on risks of higher food prices, BOE policymaker Spencer Dale said last month, adding that the BOE does not foresee inflation below 2% until the third quarter of 2014.
BOE policy makers opted to leave both interest rate and APF size on hold for another month, probably waiting for positive signs from their FLS program on the economy which is in the throes of a triple-dip recession.
Carney said the Bank of England should gradually exit the unconventional policy and that should be achieved “in a wave that doesn’t disturb financial markets,” while Miles sees that "it was probably possible to achieve higher output growth without causing any material inflationary pressure."
In November`s inflation report, the bank said "inflation is likely to fall back in the second half of next year, as the impact of external price pressures ease and a partial recovery in productivity growth dampens domestic cost growth."
The bank highlighted in Nov. that he main factors that are likely to put pressure on inflation are the rise in energy costs which may affect spending, the government’s austerity measures which is weighing on economic activities and the recent advance of the British pound which is affecting companies’ competitiveness.
Regarding growth, the BOE may cut its outlook for the British economy, citing the recent drop in the last three months of last year which put the U.K. in the throes of a triple-dip recession.
Taking into consideration all uncertainties, "the economy is likely to see a sustained, but slow, recovery over the next three years," the BOE November`s inflation report said, noting that the U.K.`s pledge to continue with austerity measures will weigh on growth prospects.
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