Currency Markets May Look Past BOE Minutes, Focus on US Inflation and Housing Data

Key Overnight Developments

• Australian Leading Index Tops Trend Growth For Second Month
• Euro, British Pound Consolidate Through Overnight Trading

Critical Levels



The Euro traded sideways in the overnight session, moving in a narrow band below 1.49 to the US Dollar. British Pound trading proved to be far choppier, but prices still remained confined to familiar territory around the 1.68 mark.

Asia Session Highlights



Australia’s Westpac Leading Index expanded 0.9% in September following a revised 1.3% gain in the previous month. The index, which aims to forecast the economy’s performance over the coming six to nine months, is now growing at an annual pace of 5.8%. This marks the second consecutive month that it has surpassed trend annualized growth of 3.1%, hinting that the Reserve Bank of Australia may step in with a third interest rate hike in December as the accelerating economy puts upward pressure on prices. A Credit Suisse gauge of rate-hike expectations now puts the priced-in probability of another 25 basis point increase at 70%.

With little else of interest on the data docket and no strong catalyst in risk trends as Asian stock exchanges seesawed with no directional conviction, markets took an opportunity to consolidate NY session gains by the US Dollar against the spectrum of major currencies as the Fed continued to scale down stimulus and economic data proved broadly optimistic.

Euro Session: What to Expect



Minutes from November’s Bank of England monetary policy meeting headline the calendar in European hours, but there seems little that can be revealed after last week’s release of the central bank’s quarterly inflation report that served as the basis for a decision to expand the quantitative easing program. The bottom line seems clear: inflation may rise “sharply” in the near term, but the medium- to long-term picture continues to point to subdued price growth. Yesterday’s release of a better-than-expected October CPI figure seems to be supportive of at least the first half of this scenario, helping to further stabilize the market’s expectations for where Mervyn King and company are headed for the time being. Perhaps the only market-moving scenario lies in the voting break-down, with sterling likely to see selling pressure if the decision to expand asset purchases by a less-than-forecast 25 billion pounds was not unanimous with a significant portion of the rate-setting committee favoring a more aggressively dovish posture.

On balance, trading may remain subdued until October’s US Consumer Price Index as well as Building Permits and Housing Starts cross the wires late into the session. Prices are expected to shrink -0.3% from a year prior, the least since the annual inflation rate turned negative in March, with improvements being forecast for both housing market metrics as well.


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