British Pound Advances on Bank of England Minutes, Euro Remains Weighed

Talking Points
•    Japanese Yen: Little Changed From Previous Session
•    Pound: BoE Votes 9-0 to Maintain Current Policy
•    Euro: Tips Lower for Second Day, Holding Narrow Range
•    US Dollar: Fed’s Beige Book on Tap

British Pound Advances on Bank of England Minutes, Euro Remains Weighed

The British Pound remained bid overnight and surged higher following the Bank of England Minutes, and the GBP/USD may continue to retrace the sell-off from the previous month as it finds near-term support around the 100-Day SMA (1.6353). Nevertheless, market participants anticipate the U.K. economy to emerge from the recession in the third quarter, with economists forecasting GDP to expand 0.2% from the three-months through June, and long-term expectations for higher borrowing costs may continue to drive the exchange rate higher over the coming months as policy makers hold an improved outlook for future growth.

The BoE Minutes showed the MPC voted unanimously to hold the benchmark interest rate at 0.50% and to maintain its GBP 175B asset purchase program in an effort to support a sustainable recovery. The central bank said “recent developments were not sufficiently compelling to justify” a shift in policy, and stated that “the November inflation report would provide an opportunity to assess more fully how the medium- term outlook for activity and inflation had evolved since August.” Moreover, the board said that “there were differences of views” amongst board member on balancing the risks for growth and inflation, but all members saw that the stimulatory effects of the asset purchase program has been “substantial” and has helped to prop up asset prices, which should support private spending “only if sustained.” At the same time, the BoE anticipates price growth to be volatile over the short-term as the economy emerges from the recession, expects third-quarter GDP to be closely in-line with the August forecast.

The Euro weakened for the second day and slipped to an intraday low of 1.4887 against the greenback, and the lack of momentum to break above 1.5000 may lead the EUR/USD to retrace the advance from the previous month. The pullback from the 14-month high looks as though investors are scaling back their bullish sentiment towards the single-currency as European Central Bank President Jean-Claude Trichet warns of the adverse effects that will accompany “excessive volatility” in the currency market, and policy makers may look to temper the appreciation in the exchange rate as it hampers the prospects for a sustainable recovery. 

U.S. dollar price action was mixed across the board during the overnight session, and the greenback is likely to face increased volatility during the North American trade as the Federal Reserve is scheduled to release its Beige Book at 18:00 GMT. The central bank is likely to hold an improved outlook for growth and inflation as policy makers see the economy emerging from the worst recession since the Great Depression however, dovish commentary may trigger a sell-off in the greenback as investors weigh the outlook for future policy. Nevertheless, as equity futures foreshadow a lower open for the U.S. market, the slump in risk appetite is likely to support the greenback going into the trading session as the reserve currency continues to benefit from safe-haven flows.


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