British Pound Vulnerable As Risk Appetite Wanes on European Banking Concerns

GBP/USD

The GBP/USD recovered a majority of its earlier losses after a better than expected U.S. initial jobless claims report added to prevailing optimism. Double dip recession concerns for the world’s largest economy have started to fade, helping curb bearish sterling sentiment, as risks trends continue to be the primary driver of price action for the pair with its correlation strengthening from 38% to 49%. Meanwhile, the BoE left their benchmark rate unchanged for an 18th straight month as elevated inflation and existing slack in the economy leave them directionless. However, despite the uncertainty of the MPC, yield expectations have also increased their relevance from 22% to 37%, as the potential exists for a rate hike or additional stimulus.

Risk Remains Driver of

GBP/USD Price Action

BoE Interest Rate Expectations

The debate will continue whether the BoE is closer to raising rates or adding additional stimulus, following today’s rate hold. If you listen to policy makers they continue to forecast that existing slack and proposed austerity measures will eventually put downward pressure on inflation, making additional asset purchases the safer bet. However, prices have remained sticky enough to raise concerns, that voting member Andrew Sentence continues to call for a rate hike. The central bank minutes will reveal if there is any change in his or the majority’s position, which could leave the GBP/USD range bound until then-outside a major shift in risk sentiment. Discuss this and trading ideas join the GBP/USD forum.

Credit Suisse (OIS) BoE

Source Bloomberg – Prepared by John Rivera

FOMC Interest Rate Expectations

The decline in U.S. initial jobless claims and a shrinking trade balance deficit were enough to improve the outlook for traders, but may have little impact on policy makers. The Fed continue to point toward remaining on hold for an extended period, and with the Obama administration proposing new measures to stimulate job growth, it is clear that the labor market remains on shaky ground. There is little event risk until next week’s retail sales and consumer price reports. Strong domestic demand and accelerating inflation could start to raise interest rate expectations, which are currently nonexistent- with markets giving a zero percent chance of a rate hike before January.

Source Bloomberg – Prepared by John Rivera

Risk

The positive U.S. labor data helped stocks build on yesterday’s gains, but markets have struggled to remain in the positive. Concerns over Europe’s financial system may remain a weighing factor and could potentially bring an end to the current bullish rally. Trend line resistance offers a technical barrier and if consumption data disappoints next week, a flight to safety could emerge-potentially weighing on the GBP/USD. Discuss this and other fundamental data in the Economics Forum.

Dow (Daily)

Source Bloomberg – Prepared by John Rivera

To discuss this report or be added to the email list contact John Rivera, Currency Analyst: jrivera@fxcm.com