The dollar slipped against the euro and sterling at the start of the week, drifting to 1.4576 and 1.9528 amid a dearth of US economic data. Meanwhile, the yen continued to benefit from heightened global risk aversion, edging higher against the euro at 154.29 and sterling at 206.78.

The G7 Finance Ministers meeting provided little news for fx traders, reiterating its stance on China to increase currency flexibility but refraining from singling out the dollar's weakness. Further, the ministers stressed that exchange rates should reflect economic fundamentals and that excess volatility and disorderly movements are undesirable. The communiqu? stated they would “closely monitor developments and take appropriate actions, individually and collectively, in order to secure stability and growth” in the economies.

Sterling Edges Higher on Inflation

UK reports on inflation helped propped the sterling higher against the dollar, edging up to 1.9528 and stabilizing from last week's losses. The core producer price index in January outpaced consensus estimates, rising to 3.2% versus 2.6% a year earlier, while the monthly data edged up to 0.8% from 0.4%. Meanwhile, the December trade deficit expanded to 7.574 billion sterling, from 7.377 billion the previous month.

In the coming session, key data to be released include January CPI and RPI. The consumer price index is estimated to edge up to 2.3%, versus 2.1% and further beyond the Bank's 2% target. A sharply higher than expected printing of CPI will likely see the sterling rally higher against the greenback tempering market expectations for aggressive easing from the BoE.

Cable hovers near 1.95, with interim resistance seen at 1.9530 followed by 1.9570 and 1.96. Subsequent ceilings are eyed at 1.9645, backed by 1.9675 and 1.97. On the downside, support starts at 1.9450, backed by 1.94 and 1.9370. Additional floors will emerge at 1.9330, followed by 1.93 and 1.9250.

JPY Firms

The yen continues to benefit from heightened risk aversion amid growing fears of a global economic slowdown. The week ahead will feature several key pieces of data from Japan, including January consumer confidence, Q4 GDP, industrial capacity and more importantly, the Bank of Japan monetary policy decision. Also, the BoJ will release its February monthly report.

Given the deterioration in global economic fundamentals and slowing demand from the US and Eurozone, Japan's outlook has also deteriorated. The Bank of Japan is not seen tightening rates and we expect the Bank to leave rates at its current level for some time, with a slight possibility for rate cuts near the end of the year.