British Pound Falls as BoE Cuts Economic Forecast

Dovish rhetoric from the Bank of England weighed on the British Pound, with the exchange rate extending the previous day’s decline to reach a low of 1.5666 during the European trade, but the overnight decline appears to be tapering off as price action holds above the 20-Day SMA at 1.5603.

Talking Points

  • Japanese Yen: Rallies Across The Board On Risk Aversion
  • Pound: Jobless Claims Falls Less-Than-Expected
  • Euro: Pares Rally From Earlier This Month
  • U.S. Dollar: Trade Balance, Monthly Budget Report on Tap

The BoE forecasts economic activity to expand at an annualized pace of 3% over the next two years and sees inflation falling back below 2% around 2012, but expects price growth to hold above target in the following year as a result of the rise in the value-added-tax (VAT).

Moreover, the central bank reiterated that the MPC stands ready to shift monetary policy “in either direction” as it maintains its dual mandate to ensure price stability and promote full-employment, and went on to say that the risks for growth remains weighted to the downside given the substantial margin of slack within the real economy. At the same time, BoE Governor Mervyn King noted that the central bank could increase the scope of its emergency program if conditions deteriorate further and maintained a cautious outlook for the region as households and businesses continue to face tightening credit conditions, and said the MPC’s current stance for monetary policy remains appropriate as the economic outlook remains clouded with uncertainties. As the central bank talks down the risks for inflation and continues to see a risk for a protracted recovery, the BoE is likely to support the real economy throughout the remainder of the year as the government tightens fiscal policy and targets the budget deficit. Nevertheless, the economic docket showed claims for unemployment benefits slipped 3.8K in July, which missed forecasts for a 17.0K decline, while the claimant count rate held steady at 4.5%, which was largely in-line with expectations.

The Euro continued to lose ground against its major counterparts, with the EUR/USD paring the advance from earlier this month to reach a low of 1.2988 during the overnight trade, and the single-currency appears to have carved out a near-term top ahead of 1.3400, which should lead to a corrective retracement as the daily RSI continues to fall back from overbought territory. With the euro-dollar slipping out of the downward trending channel, the break below 20-Day SMA (1.3039) could lead to a test of the 100-Day SMA at 1.2813 later this week, but price action could hold around 1.3000 throughout the remainder of the day after falling nearly 200 points from the open.

The greenback continued to gain ground against its currency counterparts, while the USD/JPY slipped to a fresh yearly low of 84.72 as the Japanese Yen strengthened across the board, and market sentiment is likely to dictate price action in the North American trade as the economic docket remains fairly light for Wednesday. Equity futures are foreshadowing a lower open for the U.S. market as market participants scale back their appetite for risk, and the shift in market sentiment may continue to drive the dollar higher as it benefits from the rise in safe-haven flows. Nevertheless, the trade deficit for the world’s largest economy is forecasted to narrow to $42.1B in June from $42.3B in the previous month, while the monthly budget statement is expected to show a shortfall of $169.0B in July following the $180.7B deficit in the month prior.

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