All eyes on the Bank of England and European Central Bank

Ahead of the latest policy announcements from both the Bank of England (BoE) and the European Central Bank (ECB), the pound continues to ease from the recent highs reached in January when we saw sterling hit a 6 year high against the South African Rand; a 4 year high against the Canadian and Australian dollars; a 2 year high against the US dollar and a 13 month high against the euro.

Yesterday, Markit reported that the UK services sector Purchasing Managers´ Index (PMI) slipped for a third month in a row to reach a seven month low in January with new business growth slowing to an eight month low. In contrast, the Markit data also showed that business confidence levels are at their highest levels since March 2010

Commenting on the data, Dr. Howard Archer, Chief Economist at IHS Global Insight suggested the data rather reinforces the view that economic growth will slow towards the 0.6% to 0.7% range throughout 2014 compared to the 0.8% quarter-on-quarter pace seen in the second and third quarters of 2013 resulting in an overall rate of expansion in Gross Domestic Product (GDP) for the UK of 2.7% in 2014.

Meanwhile, the British Retail Consortium (BRC) reported that UK shop prices dropped by 1% between January 2013 and January 2014. This follows an 0.8% decline in December 2013, the largest fall since December 2006.

Helen Dickinson, BRC Director General suggested that this time around the usual promotions and discounts often seen at the start of the year have been deeper and more widespread and that trend is more than likely to continue.

Analysts now await the latest policy decision by the BoE. Whilst no one is expecting any change to UK interest rates, on hold at the historic low of just 0.5% since March 2009 and to the Quantitative Easing (QE) program, now at £325 billion some are suggesting that the BoE may ramp up its ‘Forward Guidance’ policy first introduced in August 2013.

The European Central Bank (ECB) also meet today to make their latest policy announcement with analysts speculating that its managing council are divided on the threat of deflation, something that could just alter the ECB’s current monetary policy stance.

At his last policy announcement in January, ECB President Mario Draghi noted that the monetary authority saw no signs of deflation but added "But, if we were to have low inflation for a very protracted period of time, it is quite clear that we should be extremely aware of the potential downside risks."

Draghi went on to promise that the ECB would act "when we have reason to think that our medium-term assessment for inflation is changing for the worse".