British Pound Volatility Likely as Traders Dissect Bank of England Meeting Minutes

Key Overnight Developments

• Westpac’s Evans Says 0.50% RBA Rate Hike ‘Not a Surprise’ in November
• Euro, British Pound Diverge Against US Dollar in Overnight Trading

Critical Levels



The Euro saw selling pressure in overnight trading, testing as low as 1.4889 to the US Dollar. The British Pound diverged from its continental cousin, racing higher to add 0.3% against the greenback.

Asia Session Highlights



Australia’s Westpac Leading Index, a gauge of the economy’s trajectory over the coming six months, rose for the third consecutive month in August, adding 1.1% from the previous month. The index’s annual growth rate printed at 1.7%, the first positive outcome in at least 6 months. Stock market gains and money supply growth led the metric higher, adding 0.8% and 1.3% respectively. Westpac chief economist Bill Evans said “the Australian economy is moving on to a much stronger growth trajectory in 2010…a decision to raise interest rates by 50 basis points in November would not be a surprise.” Australia became the first major economy to raise borrowing costs in the aftermath of last year’s global financial crisis and credit crunch and signaled more tightening was on the way, a view that was reinforced by yesterday’s release of the policy meeting’s minutes. Traders are now betting that rates will rise by 214 basis points over the next 12 months according to a Credit Suisse gauge of priced-in expectations derived from trading in overnight index swaps.


Euro Session: What to Expect



Minutes from October’s Bank of England policy meeting is the only item of note on the economic calendar, with traders keen to tease out any details about policymakers’ plans for their asset-buying “quantitative easing” (QE) scheme. Public comments from the bank’s Monetary Policy Committee (MPC) members have sent mixed signals: Paul Fisher floated the idea that the program may be ended as early as November in an interview with Financial Times last week, while Adam Posen said just yesterday that he may support expanding the program beyond the current 175 billion pounds. The British Pound has been very responsive to this commentary, opening the door for volatility as the report crosses the wires and the markets get a sense the balance of power between the hawks and the doves going into next month’s release of an updated inflation forecast, which many observers (including former MPC member David Blanchflower) have said will likely coincide with any policy changes.


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