British Pound Little Changed Following BoE, Euro Holds Narrow Rate as ECB Maintains Outlook

Talking Points
•    Japanese Yen: Rally Stalls as Risk Appetite Returns
•    Pound: BoE Extends Asset Purchase Program
•    Euro: ECB Monthly Report Sees Moderate Growth, Subdued Inflation
•    US Dollar: Treasury Secretary Geithner, Monthly Budget Statement on Tap

British Pound Little Changed Following BoE, Euro Holds Narrow Rate as ECB Maintains Outlook

The British Pound halted the two-day decline against the greenback and rose to a high of 1.6348 following the rise in risk appetite, but was little changed subsequent to the Bank of England policy meeting as the central bank maintained the benchmark interest rate at 0.50% and kept its asset purchase program at GBP 200B. As a result, we are likely to see the GBP/USD remain bid going into the North American trade as equity futures foreshadow a higher open for the U.S. market however, the lack of momentum to cross back above the 100-Day SMA at 1.6418 may keep the pair within a narrow range over the remainder of the week as investors weigh the outlook for future policy.

The BoE maintained its current policy this month as widely expected, but said it would take another two-months to complete the emergency program, leaving the door open for an expansion in the AFP. At the same time, the central bank announced that it would keep the scale of the program under review as policy makers aim to balance the risks for the economy, and fears of a protracted recovery could lead the MPC to ease policy further over the coming months as policy makers strive to steer the economy out of recession. Nevertheless, as the BoE sees a risk for inflation to rise over the near-term, a rise in the PPI due out tomorrow at 9:30 GMT could drive the pound-dollar higher, and may keep the pair within a broad range over the remainder of the month as investors weigh the prospects for a sustainable recovery.

The Euro held a narrow range throughout the overnight session and looks to have carved out a short-term bottom this week following the rebound in risk appetite, and the single-currency may continue to hold a broad range throughout the month as investors weigh the outlook for future policy. The European Central Bank monthly report reiterated President Trichet’s comments from the policy meeting earlier this month, stating that the Governing Council “expects the euro-area economy to grow at a moderate pace in 2010,” and went onto say that the recovery “is likely to be uneven and that the outlook remains subject to high uncertainty.” Moreover, policy makers repeated that the “current rates remain appropriate” as price pressures are expected to “remain subdued over the policy-relevant horizon,” and said improving market conditions will allow the central bank gradually unwind the emergency measures as the economy emerges from the recession. At the same time, ECB board member Ewald Nowotny said that the labor market is likely to deteriorate further and expects to see a stronger recovery in the U.S. compared to Europe, and argued that the euro should have a balanced exchange rate versus the dollar as the marked appreciation in the single-currency raises the downside risks for growth and inflation. Nevertheless, the economic docket showed wholesale prices in Germany increased 0.7% in November after contracting 0.4% in the previous month, while the annualized rate slipped 3.2% from the previous year to mark the smallest decline since November 2008, and price pressures are likely to remain weak going into the following year as policy makers anticipate a moderate recovery in the euro-region.

The U.S. dollar price action was mixed overnight, with the USD/JPY halting the three-day decline to trade at 88.30, and the reserve currency is likely to face increased volatility going into the North American session as Treasury Secretary Timothy Geithner is scheduled to testify in front of the Congressional Oversight Panel on TARP at 15:00 GMT. Meanwhile, the U.S. trade deficit is forecasted to widen to $36.8B in October from $36.5B in the previous month, while the monthly budget state is expected to show a short-fall of $131.6B in November from 125.2B in the previous month. Moreover, initial jobless claims are projected to fall to 455K in the week ending December 5 from 457K in the previous week, while continuing claims are anticipated to slip to 5450K in the week ending November 25 from 5465K in the week prior.


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