British Pound Stumbles on BoE Comments, Euro Continues to Push Towards Yearly High

Talking Points
•    Japanese Yen: Mixed Across the Board
•    Pound: Jobless Claims Rise Less Than Expected
•    Euro: ECB Sees No Imminent Shift in Policy
•    US Dollar: Risk Trends to Drive Price Action

British Pound Stumbles on BoE Comments, Euro Continues to Push Towards Yearly High

The British pound jumped to a high of 1.6799 as the Bank of England raised its outlook for growth and inflation, but tumbled to a low of 1.6621 during the quarterly inflation report as Governor Mervyn King held a cautious outlook for the economy. Meanwhile, the central bank head said that its asset purchase program has worked rather effectively and sees a stronger outlook for the fourth-quarter as policy makers see the economy returning to growth, and said that the committee maintains an open mind for future policy as the MPC maintains its dual mandate to ensure price stability while promoting full employment. Despite the sharp pull back in the GBP/USD, the pair continued to hold within the previous-day’s range and the currency may continue to hold steady going into the U.S. trade as the markets absorb the comments from the central bank.

BoE Governor Mervyn King said that the outlook for price growth is “somewhat higher” than the bank previous expected in August, and forecasts consumer prices to reach a trough of 1.1% in the first quarter of 2011 as policy makers expect the slack in the economy to persist going into the following year. At the same time, the central bank saw a risk for inflation to exceed its 2% target in 2010 as the board anticipants CPI to average 1.6% over the next two years. Moreover, Mr. King anticipates the 3Q GDP estimate to be revised “a little” higher as the expansion in monetary and fiscal policy continues to support the economy, but went onto say that the nation faces a prolonged period of adjustment as he urges the government to develop a credit plan to restore public finances. In addition, the central bank head said that the outlook for medium-term inflation will drive policy going forward as the board expects price pressures to rise sharply in the short run, but noted that the weakness in the exchange rate will help to smooth the rebalancing phase and saw little risk for a double-dip recession as the emergency programs help to shore up the real economy. Meanwhile, jobless claims in the U.K. increased 12.9K in October amid expectations for a 20.0K rise, while the claimant count rate increased to an annual rate of 5.1% from 5.0% in the previous month, which was in-line with forecasts. As the economic outlook improves, the BoE may turn increasingly hawkish as they continue to see a risk for inflation to overshoot the target in 2012, and long-term expectations for higher interest rates in the U.K. may support the recent rally in the British pound as investors weigh the outlook for future policy.

The euro retraced the previous day’s decline and pushed to a high of 1.5050 during the overnight session following the rise in risk appetite, and the single-currency looks poised to test the yearly high at 1.5064 as market sentiment improves. Meanwhile, ECB board member Jose Manuel Gonzalez-Paramo held a neutral outlook for future policy and said the central bank does not intend to shift its policy stance over the near-term, and stated that “our preparations for a gradual exit from these measures, however, do not suggest that fundamental change in policy is imminent.” At the same time, Governing Council Member Marko Kranjec held a cautious outlook for the economy and said that “there is an urgent need to resist demands” from government officials to “extend lending even in cases where recession has permanently destroyed business prospects of many enterprises,” and went onto say that “demands for more risk lending and for higher capital buffers are mutually inconsistent and do not help seed exit from the crisis.” The dovish rhetoric held by the central bank suggests that the ECB will keep the benchmark interest rate at the record-low even as the Governing Council looks to scale back its emergency programs, and the single-currency may continue to hold a broad range over the near-term as the central bank holds a dovish outlook for inflation.

The greenback weakened against most of its major currency counter parts following the rise in risk appetite, and the dollar may face increased selling pressures going into the North American trade as equity futures foreshadow a higher open for the U.S. market. The lack of event risk will leave the reserve currency as the mercy of trader sentiment, and the dollar index may continue to hold the downward trend from March throughout the remainder of the year as risk trends continue to drive price action in the foreign exchange market.


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