British Pound Weighed by Bank of England Testimony, Euro Gives Back as Risk Appetite Falters

Talking Points
•    Japanese Yen: Rallies Across the Board on Risk Aversion
•    Pound: Bank of England Maintains Cautious Outlook for U.K.
•    Euro: IFO Business Confidence Survey Unexpectedly Weakens
•    U.S. Dollar: Consumer Confidence, Richmond Fed Index on Tap

British Pound Weighed by Bank of England Testimony, Euro Gives Back as Risk Appetite Falters

The British Pound tumbled lower during the European trade as U.K. policy makers continued to see a risk for a protracted recovery, and the currency may face increased selling pressures going into the North American session as the Bank of England maintains a dovish outlook for future policy. BoE Governor Mervyn King said that the central bank stands ready to take appropriate measures as he continues to see downside risks for the economy, and reiterated inflation is likely fall back below the 2% later this year during his testimony in front of the Parliament.

Moreover, the central bank head stated that the nation “has embarked on a process of healing, which is expected to “take time,” and went on say that the MPC will normalize policy “in due course” as the board aims to encourage money growth. In addition, Mr. King argued that U.K. has a very large public deficit that has yet to be tackled, but said he would be “immensely surprised” if the U.K. lost its top credit rating as policy makers take the appropriate steps to balance the risks for the economy. At the same time, the economic docket showed loans for home purchases tumbled to an annual pace of 35,083 in January from a revised 45,650 in the previous month, according to report by the British Bankers Association, and the central bank is likely to maintain a wait-and-see approach over the coming months as they assess the impact of the emergency measures. However, as policy makers continue to see ongoing slack in the economy, the BoE may look to expand its asset purchase program in the first-half of the year as they maintain a 2% for inflation.

The Euro pared the overnight advance and tipped lower against the greenback for the second day as investors scaled back their appetite for risk, and the single-currency may continue to trend lower throughout the remainder of the day as equity futures foreshadow a lower open for the U.S. market. Nevertheless, business confidence in Germany unexpectedly weakened in February, with the headline reading slipping to 95.2 from 95.8 in January, while the gauge for future expectations advanced to 100.9 from 100.6. Meanwhile, European Central Bank board member Miguel Angel Fernandez Ordonez held a cautious for Spain’s economy and said that bad loans will continue to rise as the labor market deteriorates, and went onto say that the government needs an “ambitious” deficit plan to bring its public finances back in-line with the mandate set by the EU.

The greenback regained its footing overnight following a rise in risk aversion, while the USD/JPY extended the decline from the previous day and slipped back below the 50-Day SMA (90.89) to reach an intraday low of 90.85. Nevertheless, consumer confidence in the U.S. is expected to weaken in February as market participants forecast the Conference Board’s index to slip to 55.0 from 55.9, while the Richmond Fed’s manufacturing index is anticipated to increase to 2 from -2 in January as business continue to replenish their stockpiles of unsold goods. Moreover, St. Louis Fed President James Bullard is scheduled to speak on Regulatory Reform at 22:05 GMT, and comments from the policy maker could move the currency market as the central bank aims to overhaul the financial system.


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