UK GDP May be Negative, German Ifo Next

The US and Australian dollars are the top performers so far on Wednesday after Obama unveiled plans to boost US manufacturing and Australian core inflation rose more than expected. UK fourth quarter GDP is the major event of European trading with IFO data and the BOE minutes as other highlights. Monday night's 14 new trades are gradually kicking in as market activity nears today's FOMC announcement.

The State of the Union address largely focused on taxation for the wealthy, as expected. Otherwise, Obama proposed ending tax breaks for companies that move jobs overseas and cutting tax rates for manufacturing. He also revisited the idea of an infrastructure stimulus program. On energy, he promoted the development of natural gas.

Market reaction has so far been tepid but the US dollar is generally higher.

The Australian dollar is the top performer as AUD/JPY hit the highest since Nov 1 after Q4 CPI. The trimmed mean, Australias measure of core inflation, climbed 2.6% y/y beating the 2.4% consensus. Although headline inflation was softer than expected, the market will now be reluctant to fully price in a rate cut at the Feb 7 RBA meeting.

The yen is broadly weaker after Japan posted a larger than expected trade deficit in December as exports missed expectations. Annual numbers also $32B deficit, the first since 1980. Expect this data point to gain more prominence in the months ahead.

At 0900 GMT, Germany releases January IFO data with small improvements expected in all the indexes. The risks are certainly to the upside after several recent positive surprises in sentiment data.

At 0930 GMT the focus shifts to the UK for Q4 GDP figures. The consensus is for a 0.1% q/q contraction. Estimates range from -0.7% to +0.2% but any miss will cause large ripples in GBP. At the same time, the minutes of the most recent BOE meeting will be released.

Later, Germany sells 30-year bonds and Monti is scheduled to address the Italian Senate on the outcome of the Ecofin meetings.

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