British Pound Holds Range as BoE Maintains Current Policy

Talking Points

• Japanese Yen: Mixed Price Action on Thursday
• Pound: BoE Maintains Current Policy
• Euro: German Inflation Cools
• U.S. Dollar: Trade Balance on Tap

The BoE refrained from releasing a policy statement yet again, and currency traders will certainly look towards the meeting minutes due out on September 22 at 8:30 GMT, which could keep the GBP/USD within a narrow range over the near-term. We are likely to see an ongoing split within the central bank as board member Andrew Sentance shifts his focus to the risks for inflation, and the question remains whether there will be a three-way split in the MPC as policy makers weigh the risks for the region. If the meeting minutes show only a two-way split like we’ve seen during the last three rate decisions, the vote count could spark speculation for the BoE to normalize monetary policy in the medium-term, which could instill a bullish outlook for the British Pound.

Throughout the course of the day, the GBP/USD is likely to maintain the narrow range carried over from the previous month, which lies from roughly 1.5300 to 1.5600. However, as market sentiment continues to dictate price action in the currency market, a rise in risk appetite could lead the pound-dollar to retrace the overnight decline to 1.5375. Over the next 24 hours of trading, we expect to see producer prices in the U.K. expand at a slower pace in August, with market participants forecasting the annualized rate to fall back to 4.8% from 5.0% in the previous month. As price growth weakens, the data could weigh on interest rate expectations and lead the Sterling to test the lower bounds of its recent range going into the end of the week.

The Euro held within the previous day’s range during the overnight trade as the European Central Bank maintained its pledge to bolster the financial system, and the single-currency should hold steady in the North American trade as the economic docket remains fairly light for Thursday. The European Central Bank repeated that it will extend its emergency bank lending program into 2011 and reiterated that monetary policy remains “appropriate” in its monthly report. However, Governing Council board member Juergen Stark held a cautious outlook for the financial system and said commercial banks in Europe’s largest economy will need additional capital according to a German newspaper. The conflicting views amongst the members of the Governing Council will certainly weigh on the outlook for future policy as central bankers continue to gauge the risks for the region, and the uncertainties surrounding the economic may continue to drag on the exchange rate over the near-term, which could eventually trigger a bearish breakout in the EUR/USD. Nevertheless, the final CPI reading for Germany showed inflation fell back to an annualized pace of 1.0% in August from 1.2% in the previous month, and the slower pace of price growth would certainly allow the Governing Council to maintain a dovish policy stance throughout the remainder of the year as it preserves its one and only mandate to ensure price stability.

U.S. dollar price action was mostly mixed throughout the European trade, with the USD/JPY holding above the fresh yearly low (83.33) as the overnight decline stalled at 83.48. As we head into the North American session, equities futures are foreshadowing a higher open for the U.S. market, which could leave the greenback treading waters throughout the day. As risk sentiment continues to dictate price action for the major currencies, traders may turn a blind eye to the trade figures for the U.S., which is expected to show the deficit narrowing to $47.0B in July from $49.9B in the previous month.

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

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