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Forex: British Pound Searches For Support Following BoE Minutes, U.K. Budget Statement

By , Currency Analyst
23 March 2011 13:30 GMT

Talking Points

  • British Pound: BoE Votes 6-3 To Hold Rate Steady
  • Euro: Portugal To Vote On New Austerity Measures
  • U.S. Dollar: New Home Sales Tap

The British Pound pared the rally from earlier this week as the Bank of England talked down speculation for a rate hike within the first-half of 2011, and the reversal in the exchange rate may gather pace going into the end of the week as interest rate expectations falter. The BoE voted 6-3 earlier this month to keep the benchmark interest rate at 0.50%, while the majority of the MPC (8-1) saw scope to maintain the asset purchase target at GBP 200B following the unexpected economic contraction in the fourth-quarter. The policy meeting minutes went onto say that most members of the committee saw “merit in waiting” given the ongoing weakness within the real economy, but noted that there was a “significant risk” for inflation to breech 5 percent as wage growth accelerates. In light of the recent developments, Credit Suisse overnight index swaps now reflect expectations for at least a 50bp rate hike in the next 12 months, which compares with speculation for a 75bp rise in borrowing costs just earlier this week, and the British Pound may work its way back towards 1.6000 as it searches for support.

As the BoE maintains a neutral tone for monetary policy, it seems as though the central bank will continue to support the real economy throughout the first-half of the year, but the MPC may face increased pressures to address the rising risk for inflation as the government looks to provide fiscal relief. Chancellor the Exchequer George Osborne said corporate taxes will be lowered by 2 percent starting from April as the government aims to encourage a sustainable recovery, and went onto say that unemployment should peak this year as private sector activity improves. However, asMr. Osborne sees economic activity increasing 1.7 percent this year versus an initial forecast for a 2.1 percent expansion in the growth rate, the new coalition in the U.K. may have to soften its approach in reducing the budget deficit, and the central bank could be forced to shore up the economy for most of 2011 as the economic outlook remains clouded with high uncertainty.

Meanwhile, heightening fears surrounding the sovereign debt crisis continued to bear down on the Euro, with the exchange rate slipping to a low of 1.4130 during the overnight trade, and the single-currency may face additional headwinds ahead of the EU Summit later this week as policy makers in Portugal struggle to meet on common ground. With the Portuguese government scheduled to vote on new austerity measures later today, the parliament looks as though it will reject the latest proposal given the strong opposition amongst the national officials, and the Euro may continue to lose ground throughout the North American trade as the risk for contagion intensifies. In turn, the EU could be forced to step up its efforts, and the group may weigh alternative measures to boost investor confidence as the governments operating under the fixed-exchange rate system face record-high borrowing costs. As the near-term rally in the EUR/USD tapers off, with the relative strength index falling back from overbought territory, the exchange rate should continue to retrace the advance from earlier this week, which could produce a test of the 20-Day SMA at 1.3951.

The greenback bounced back on Wednesday as uncertainties surrounding the world economy dragged on market sentiment, and the dollar may continue to gain ground throughout the North American trade as investors scale back their appetite for risk. Nevertheless, new home sales in the world’s largest economy is expected to increase 2.1% in February to an annualized pace of 290K, and the data could certainly spark a shift in market sentiment as the outlook for future growth improves. However, as the financial markets remain in disarray, the rise in risk aversion may gather pace going into the end of the week, and the U.S. dollar may continue to outperform against its major counterparts as it benefits from safe-haven flows.

Will the EUR/USD Continue to Retrace the Decline From November? Join us in the Forum

Related Articles: Weekly Currency Trading Forecast

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

FX Upcoming

Currency

GMT

EST

Release

Expected

Prior

USD

11:00

07:00

MBA Mortgage Applications (MAR 18)

--

-0.7%

USD

14:00

10:00

New Home Sales (FEB)

290K

284K

USD

14:00

10:00

New Home Sales (MoM) (FEB)

2.1%

-12.6%

EUR

15:00

11:00

Euro-zone Consumer Confidence (MAR)

-11.0

-10.0

Currency

GMT

Release

Expected

Actual

Comments

NZD

21:45

Current Account Balance (4Q)

-2.20B

-3.524B

3rd consecutive deficit

NZD

21:45

Current Account Deficit-GDP Ratio (4Q)

-2.5%

-2.3%

Eases off record high

GBP

09:30

BBA Loans for House Purchase (FEB)

29350

29923

Highest since Oct ‘10

EUR

10:00

Euro-zone Industrial New Orders (MoM) (JAN)

1.0%

0.1%

Weakest growth since contraction in Sept. ‘10

EUR

10:00

Euro-zone Industrial New Orders (YoY) (JAN)

21.4%

20.9%

Best since Aug ‘10

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23 March 2011 13:30 GMT