The following is an excerpt from a Capital Daily report by London-based research provider Capital Economics.

-    Potential divergence in US and UK monetary policies is exaggerated

-    Yen’s slump means Japan likely to report positive June inflation data (00.50 BST)

-    Germany’s recovery will probably be modest

Key Market Themes

Sterling’s dip on Thursday after the release of relatively encouraging UK Q2 GDP data (see below) presumably reflects a view that the MPC will now feel even more inclined to issue some form of formal forward guidance next month to reassure the markets that interest rates will stay low. But we are not convinced UK monetary policy will drive sterling back down to multi-year lows against the dollar any time soon.

The fall in sterling earlier this year was partly due to expectations that Mark Carney’s arrival would see the MPC ramp up quantitative easing just as the US Fed was tightening the monetary screws.

However, a tapering of the Fed’s asset purchases is surely now discounted. And even when it does start to reduce its purchases, the Fed will still be stimulating the economy and boosting the monetary base.

Meanwhile, Carney voted along with the rest of the MPC earlier this month to keep QE unchanged, so for now at least, there will be no such additional boost to the monetary base in the UK. Admittedly, there is still an outside chance that the Bank will ramp up its asset purchases again in due course. But the focus for now appears to have switched to the sort of forward guidance that the Fed itself is already implementing.

Forward guidance is effectively a pledge that conventional monetary policy is set to remain accommodative for an extended period. Indeed, we do not expect to see interest rates rise in either the US or the UK before the end of next year. Accordingly, talk of a major divergence in US and UK monetary policies is exaggerated in our view.

What’s more, monetary policy is not the only driver of exchange rates. Sterling has also been weak against the euro even though the ECB has cut rates and may do so again. This is probably due to an easing of the crisis in the euro-zone. Nonetheless, we think much of this boost has now run its course, which should prevent the pound from falling further against the euro as well.

Finally, while Thursday’s GDP report may not have been that impressive, the economy is clearly improving in the UK – more so than in the euro-zone, though less so than in the US. The upshot is that we continue to forecast that the pound will end the year at $1.50 and €1.20, respectively. This is consistent with a small decline against the dollar and a small rise against the euro from current levels. (Jessica Hinds & John Higgins)

What to watch for today: United States

No major data or events scheduled for today.

Despite the much bigger than expected 4.2% m/m surge in orders in June, the latest durable goods report actually suggests that business investment may have contracted in the second quarter, adding to our fears that overall GDP growth could be below 1.0%. The surge in headline orders was principally due to a 31.4% m/m jump in commercial aircraft orders and a 29.6% m/m increase in defence orders. (Paul Ashworth)

Continental Europe

No major data or events scheduled for today.

July’s rise in the German Ifo (published on Thursday) added to evidence that the economy is recovering, but the recovery is likely to be modest. The rise in the Business Climate Indicator, from 105.9 to 106.2, was broadly in line with the consensus forecast but perhaps came as a slight disappointment after Wednesday’s sharper rise in the PMI. We still see GDP rising modestly at best this year and next. (Jennifer McKeown)

Japan

June’s national CPI data (00.30 BST) are likely to show the first positive inflation numbers in a year, although this would largely reflect the slump in the yen. Excluding food and energy, much of which is imported, inflation should still be negative and is likely to remain so for some time. (Julian Jessop)

China

No major data or events scheduled for today.

The small package of measures unveiled by the State Council late on Wednesday doesn’t amount to much in financial terms. Small firms will temporarily be made exempt from VAT and business tax; red-tape and fees are being reduced for exporters; and the private sector is being encouraged to invest in China’s railways. The last of these is an attempt to clear up the financial mess caused by the breakneck debt-financed expansion of railways over recent years. Similar targeted measures are likely over coming months. For example, we might see some infrastructure project approvals being speeded up and old plans for subsidies on environmental goods dusted off. The goal appears to be to stabilise the economy rather than to drive a rebound, with efforts focussed on selected sectors. Our 7.5% GDP forecast for this year already implies that growth will stabilise for a quarter of two. But China is only just getting to grips with its structural imbalances. Over the medium term, a further slowdown is likely. (Mark Williams)

Other Asia-Pacific

The Reserve Bank of New Zealand (RBNZ) kept its policy rate unchanged at 2.5% on Thursday, as was widely expected. We expect the rate to remain on hold for the rest of the year. A hike will become more likely in early 2014 if, as we expect, the currency continues to slide and the global economy picks up. (Krystal Tan)

The decision by the Philippine central bank (BSP) on Thursday to leave interest rates on hold was no great surprise given that growth remains strong and inflation looks set to stay subdued. We expect interest rates to remain on hold for the rest of the year, but for the BSP to start tightening monetary policy next year. 

GDP data released on Thursday shows that Korea’s economy picked up in Q2. Although low inflation means policymakers still have scope to cut rates, with the recovery showing signs of gaining momentum, we think the easing cycle is over. (Gareth Leather) 

Key Data and Events

Fri 26th      -    Col  Interest Rate Announcement (Jul)   

            00.30  Jpn  National CPI (Jun)     

            00.30  Jpn  National CPI ex. Fresh Food (Jun)  

            00.30  Jpn  National CPI ex. Food & Energy (Jun)     

            00.30  Jpn  Tokyo CPI ex. Fresh Food (Jul)     

            06.00  Spr  Industrial Production (Jun)  

            07.45  Fra  Consumer Confidence Indicator (Jul)

            14.55  US   Uni. of Mich. Consumer Confidence (Jul. Final)