FOREX: British Pound Falls Ahead of Bank of England Rate Decision

Overnight Headlines

• US Dollar Rallies as Bernanke Comments Stoke Risk Aversion
• Australian Jobs Data Sends Mixed Signals as Full-Time Hiring Falls

Critical Levels

The Euro and the British Pound declined in overnight trade, down 0.5 and 0.2 percent respectively against the US Dollar ahead of the opening bell in Europe as the greenback capitalized on a return to risk aversion in Asian trade (see below). We maintain a bearish outlook on EURUSD and GBPUSD.

Asia Session: What Happened

The US Dollar pushed broadly higher in overnight trade as stocks sold off in Asia after Federal Reserve Chairman Ben Bernanke poured cold water on investors’ optimism in the wake of last Friday’s drop in the US unemployment rate, saying the metric is likely to remain high “for some time”. We suspected the markets’ cheery take on the data would be short-lived considering the drop in the jobless rate owed to the lowest labor-force participation since 1984, not a pickup in hiring. The greenback added as much as 0.4 percent on average against its major counterparts while the MSCI Asia Pacific regional benchmark stock index slumped 0.8 percent.

The Australian Dollar underperformed, sliding as much as 0.8 percent against its US namesake as a mixed set of Employment figures failed to arrest risk-linked selling. While the headline reading showed the economy added 24,000 jobs in January – topping expectations for a 17,500 increase – details of the report showed the increase came entirely from part-time jobs. Meanwhile, full-time hiring declined for the first time in three months and December’s reading was revised sharply lower. On balance, a preference for part-time workers hints at employers’ unwillingness to commit to long-term labor contracts, pointing to a lack of confidence in the economy’s growth prospects.

Euro Session: What to Expect

All eyes are on the monetary policy announcement from the Bank of England, with investors positioned for hawkish turn in policymakers’ rhetoric. Indeed, a Credit Suisse gauge of priced-in rate hike expectations for the next 12 months stands at the highest in year.

On balance, this seems reasonable. While economic growth disappointed in the four quarter, the overall outcome for 2010 outdid the central bank’s own forecasts.

Meanwhile, the annual inflation rate stands at an eight-month high, challenging the central bank’s credibility as a bulwark of price stability considering Mervyn King and company spent most of last year promising that CPI would retreat on its own only to see it continue to march upward. Minutes from January’s BOE sit-down reinforced the likelihood that policymakers would err on the side of price stability, opting to handle the threat of a back-slide into recession on the back of the government’s austerity measures when and if it materializes.

While this seemingly points the way higher for the British Pound, the currency’s gains may be limited against safe-haven counterparts like the US Dollar with overall risk appetite still noticeably bruised in the aftermath of Ben Bernanke’s sobering comments overnight. Stock index futures are tracking lower ahead of the opening bell, hinting the greenback is poised to extend gains as risk aversion persists in European hours.

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