FOREX: British Pound May Rebound on Bank of England Minutes

Overnight Headlines

• Swiss Franc Drops as Amid Signs Euro Zone Debt Fears Easing
• British Pound Holds Post-GDP Range Ahead of BOE Minutes

Critical Levels

The Euro and the British Pound tracked sideways in overnight trade, with the single currency oscillating in a well-defined band below 1.37 to the US Dollar while sterling remained in the range established after the drop following yesterday’s UK GDP report.

Asia Session: What Happened

On balance, most major currencies saw little net change in Asian hours as markets braced for the upcoming Federal Reserve interest rate decision.Traders will be most concerned with quantifying policymakers’ “threshold” for reducing or even suspending the second round of quantitative easing (QE) before its scheduled completion after hints at the existence of such a barrier suddenly emerged in Fed officials’ comments over recent weeks. The voting pattern ought to prove significant as well as four regional Fed presidents – including the hawkish Charles Plosser and Richard Fisher – will rotate into active positions on the rate-setting FOMC.

The Swiss Franc underperformed, weakening across the board after an average of credit-default swap (CDS) spreads from the currency bloc’s most debt-stricken periphery member states (the so-called PIIGS, meaning Portugal, Ireland, Italy, Greece and Spain) dropped for a fifth consecutive day. The reading suggests the markets’ perceived likelihood of a sovereign default in any of the aforementioned countries has dropped to the lowest in over two months, sapping demand for the Swiss currency as a safe-haven alternative to the Euro.

Euro Session: What to Expect

The spotlight falls on the Bank of England as it publishes minutes from January’s rate-setting meeting, with traders keen to gauge how policymakers plan to reconcile the highest inflation rate in eight months with yesterday’s bitterly disappointing fourth-quarter GDP result.

On one hand, containing price growth is becoming a credibility issue for the central bank after it wrongly argued all through last year that the inflation was propped up by temporary factors and would subside on its own. On the other, even discounting the effects of an atypically early onset of winter, the UK Office of National Statistics (ONS) said growth would have been “flattish”. This would still translate into the worst outcome since the three months through September 2009, an ominous signal of things to come considering the full effects of the government’s spending cuts have yet to make themselves felt in full.

Interestingly, although a Credit Suisse gauge of priced-in rate hike expectations for the year ahead pulled back in the aftermath of the GDP release, the steep uptrend in place since late November remains intact. This hints traders continue to suspect that policymakers may err on the side of price stability. This makes sense: the central bank’s quarterly inflation report (published in November) predicted economic growth would rise 1.17 percent in 2010; even with the disappointing fourth-quarter outcome, the annual increase amounts to 1.64 percent. While BOE Governor Mervyn King delivered a decidedly dovish speech yesterday, other members of the policy-making MPC may be starting to sway toward a more hawkish posture, with any indication of as much in today’s release likely to offer a reprieve to the British Pound after yesterday’s selloff.

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