Forex Flash: Next week's main headlights in FX – Merrill Lynch

Merrill Lynch analysts warn of the impending fiscal cuts that are likely to trip GDP growth: “The full sequester is poised to hit on March 1, and as Ethan Harris notes in this edition, the probable $50bn spending cut over a seven-month period would amount to a 0.5% of GDP shock”, wrote analyst Gustavo Reis, expecting GDP growth of just 1% in 2Q.

In regard to this weekend's election in Italy, the greatest post-election risk is a deteriorated growth outlook rather than the backtracking of recent reforms: “Whoever wins the elections has limited room to evade the new balanced budget rule, but growth prospects may dim further if a “reform-fatigued” coalition triumphs”, said Merrill Lynch analysts.

Crossing over to Japan, all eyes remain on the dovish spirit of the government and speculation about who's going to lead the BoJ: “Whoever takes the job from among the frontrunners is likely to be closely aligned with the administration, and therefore set to strike a notably more dovish tone than current Governor Shirakawa. Looking ahead, the real test comes during the new BoJ’s first policy meeting in early April”, they wrote.