Pound rallies as BoE drops dovish tone

Talking Points

  • Japanese Yen: Loses Ground Against Majors
  • British Pound: BoE Sees Inflation Holding Above Target
  • Euro: Holds Narrow Range
  • U.S. Dollar: Import Prices, Monthly Budget Statement on Tap

The British Pound rallied to a high of 1.6098 during the European trade as the Bank of England dropped its dovish outlook for inflation, and the U.K. currency may continue to trend higher over the near-term as investors scale back speculation for further easing. The BoE said price growth will stay above target throughout 2011 as the central bank expects the economic recovery to gather pace over the following year, and went onto say that the MPC’s forecast for growth and inflation is “wider than usual” as the economic outlook remains “highly uncertain.” Moreover, the central bank reiterated that it stands ready to move monetary policy in “either direction” as it aims to balance the risks for the region, and the MPC may see scope to start normalizing policy in the following year given the stickiness in price growth.

As the GBP/USD holds above the 20-Day SMA at 1.5945, the pair looks poised to retrace the decline from earlier this week, and the exchange rate should work its way towards the 23.6% Fibonacci retracement from the 2009 low to high around 1.6220-40 in the days ahead as it maintains the upward trend from May. With the quarterly inflation report out of the way, all eyes will be focused on the BoE policy meeting minutes due out on November 17, and we expect to see a three-way split within the MPC as board member Andrew Sentance pushes for a 25bp rate hike, while Adam Posen sees scope to expand monetary policy further. Given the stickiness in price growth, members of BoE may heed to Mr. Sentance’s call as inflation continues to hold above the government’s 3% limit, and hawkish comments from the central bank could spark another bullish reaction in the British Pound as investors weigh the prospects for future policy.

The Euro fell back from a high of1.3824 on Wednesday as investors scaled back their appetite for risk and the single-currency may come under increased selling pressures during the North American trade as equity futures foreshadow a lower open for the U.S. market. As fears surrounding the European debt crisis resurface, the EUR/USD may continue to retrace the advance from September as the governments operating under the fixed-exchange rate system struggle to manage their public finances, and the European Central Bank may face increased pressures to support the real economy throughout 2011 as policy makers see the recovery tempering off. However, we may see the EUR/USD hold a narrow range throughout the day as the overnight decline tapers off ahead of former support around 1.3700, and the exchange rate may continue to trend sideways over the near-term as it maintains the range from the previous month.

U.S. dollar price action was mixed on Wednesday, with the USD/JPY extending the rally from the previous day to reach a high of 82.41, and greenback could face increased volatility during the North American trade as the economic calendar is expected to reinforce a mixed outlook for the world’s largest economy. Import prices in the U.S. are forecasted to increase 1.2% in October after contracting 0.3% in the previous month, while the trade deficit is expected to narrow to $45.0B in September from $46.3B in the month prior. At the same time, initial and continuing jobless claims are projected to fall further for the weeks ending November 6 and October 30, while the monthly budget statement is anticipated to show a $140.0B deficit for the month of October.

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