British Pound Takes Center Stage Ahead of Bank of England Minutes, Jobs Report

Key Overnight Developments

• Bank of Japan Leaves Rates Unchanged, Doubles Bank Lending
• Japanese Service Demand Outperforms, Adds Most in Two Decades
• Euro, British Pound Diverge Against US Dollar in Overnight Trade

Critical Levels



The Euro tracked slightly higher in overnight trade, adding 0.1 percent against the US Dollar. The British Pound diverged from its continental counterpart, slipping nearly 0.2 percent against the greenback. We remain short EURUSD at 1.4881 and GBPUSD at 1.5765.

Asia Session Highlights



The Bank of Japan kept benchmark interest rates on hold at 0.10% as expected but boosted the size of its bank lending program to 20 trillion yen, doubling the facility from the 10 trillion yen that was put in place in December. Policymakers left their economic assessment unchanged and repeated the now familiar language saying the economy is “picking up” but the pace of self-sustained growth is not sufficient, with monetary conditions to remain “extremely accommodative” as beating deflation remains a “critical challenge”.

Interestingly, the Japanese Yen jumped higher as the announcement crossed the wires before resuming a risk sentiment driven selloff, a seemingly counter-intuitive outcome considering the expansion of quantitative easing. The move likely reflected the relatively small amount of new money actually being added into the economy, which nets out to only about 4 trillion yen considering the additional 10 trillion is being introduced as several already existing QE programs are allowed to expire. In all likelihood, the decision to boost the lending program was a token gesture to help mute increasingly shrill calls out of the government to do something about deflation. As we have previously discussed however, this is a veiled attempt to force the BOJ to expand asset purchases, keeping bond prices supported and borrowing costs under control as the Ministry of Finance prepares to finance Japan’s ballooning public deficit. The central bank has been resisting to the best of its ability, and today’s announcement of what is at best a very limited liquidity expansion seems indicative of their intent to continue to do so.

Meanwhile, Japan’s Tertiary Industry Index of service demand surged 2.9 percent in January, the first increase in three months and the largest monthly gain in nearly 21 years. Spending on wholesale and retail services, which accounts for nearly a third of the sector, grew by an impressive 5.2 percent to hint that consumers are starting to become more willing to spend, a welcome sign for the world’s second-largest economy as it tries to gain traction after emerging from recession in the fourth quarter of last year. More of the same is likely ahead after consumer confidence rose for the second consecutive month in February.


Euro Session: What to Expect



The release of minutes from the March policy meeting of the Bank of England headlines the economic calendar, with the British Pound likely to rise if the monetary authority is able to convince the markets that it has truly shifted gears from an outright dovish posture to a wait-and-see approach. Mervyn King and company were seemingly intent on projecting a neutral bias with this month’s announcement, predictably leaving both elements (interest rates, quantitative easing) of its policy on hold and conspicuously opting out of issuing an accompanying statement to update the markets on their thinking.

The bank came out looking dovish in February despite having paused QE at 200 billion pounds, with the quarterly inflation report that served as the basis for the outcome proclaiming that “the pace of recovery is somewhat less strong than [previously expected]” and arguing that “it is far too soon to conclude that no more [asset] purchases will be needed.” A statement of confidence in the fiscal landscape (as in last week’s comments by MPC member Adam Posen, who reminded markets that “all three major [political] parties have made it clear that they are going to pass some kind of austerity budget” ahead of general elections due to be called no later than June) and a unanimous vote to do nothing for the time being may help convince the markets that the BOE – rightly or wrongly – is indeed genuinely neutral on where to go from here. With the British Pound now appreciably undervalued on a purchasing parity basis against a good deal of its major counterparts (most notably the Euro), shedding the central bank’s dovish image may be just the thing to send the UK unit higher in the near term.

Barring major downside surprises, remainder of the of the UK economic calendar should not get in the way of a BOE-driven Pound advance as Jobless Claims rise by just 6,000 in February – a far smaller increase than the 23,500 surge recorded in the previous month – while the Claimant Count (a measure of unemployment) holds at 5% for the sixth consecutive month, hinting that the UK labor market may stabilized.

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