British Pound Halts Four-Day Advance Following BoE Comments, Euro Pares Decline on Dollar Weakness

Talking Points
•    Japanese Yen: Mixed Across the Board
•    Pound: Rightmove Housing Index Rises for Second Month
•    Euro: Poised to Test Yearly High
•    US Dollar: Bernanke, NAHB Housing Index on Tap

British Pound Halts Four-Day Advance Following BoE Comments, Euro Pares Friday’s Decline on Dollar Weakness

The British Pound advanced to a high of 1.6373 following the larger-than-expected rise in U.K. home prices however, the currency pared the overnight gain and halted the four-day rally as market participants speculate the Bank of England to expand its asset purchase program in an effort to jump-start the economy. At the same time, Ernst & Young’s Item Club raised its economic outlook for the region and projects GDP to expand at an annual rate of 1.0% in 2010 amid an initial forecast for a 0.5% rise in July, and anticipants the central bank to tighten policy in “early 2010” as economic activity improves.

The Rightmove House Price index jumped 2.8% in October after rising 0.6% in the previous month, with the annual rate rising 0.2% from the previous year to mark the first advancing since June 2008. The data suggests housing conditions will continue to improve throughout the second-half of the year as the government takes unprecedented steps to stabilize the ailing economy but nevertheless, market participants speculate the BoE to ease policy over the coming months as policy makers hold a dovish outlook for inflation. According to an interview with the Sunday Times, board member Adam Posen said that he is “not worried about overshooting inflation,” and went onto say that “the biggest risk to a sustainable private-sector recovery is that the banking system problems are not fully resolved by the time” the central bank find its appropriate to implement an exit strategy. The cautious tone held by Mr. Posen suggests that the BoE will maintain a dovish policy stance going forward, and may look to increase its asset purchases as the banking system remains weak.

The euro retraced the previous day’s decline and rose to an intraday high of 1.4955 on the back of U.S. dollar weakness, and the EUR/USD may continue to trend higher over the near-term as investors maintain expectations for higher interest rates in the region. Credit Suisse overnight index swaps are up by more than 100bp in October as investors anticipate the European Central Bank to tighten policy going into the following year, and the pair may continue to retrace the sell-off from August 2008 as market participants raise their appetite for higher yielding investments. As a result, the EUR/USD looks poised to break above the yearly high at 1.4970 and may test 1.5000 for psychological resistance as the greenback continues to face increased selling pressures across the board.

The U.S. dollar weakened against most of its major counterparts as investors moved into higher-yielding assets, and the reserve currency may continue to lose ground going into the North American trade as equity futures foreshadow a higher open for the U.S. markets. Nevertheless, the NAHB housing market index is expected to increase for the fourth consecutive month in October, with economists forecasting the gauge to rise to 20 from 19 in the previous month, and the data is likely to encourage an improved outlook for the world’s largest economy as policy makers see the nation emerging from the worst recession since the Great Depression. At the same time, Fed Chairman Ben Bernanke is scheduled to speak at 21:00 EST, along with board Janet Yellen at the San Francisco Fed Conference, and dovish comments following the event could trigger another round of weakness for the greenback as investors weigh the outlook for future policy.


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To discuss this report contact David Song, Currency Analyst: dsong@fxcm.com

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