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Pound Losses Limited As Risk Appetite Continues, Will U.K. Budget Statement Add Weight?

Pound Losses Limited As Risk Appetite Continues, Will U.K. Budget Statement Add Weight?

2010-03-23 17:53:00
John Rivera, Currency Analyst
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BoE Interest Rate Expectations
 
Overnight index swaps are now pricing in 45 bps of rate hikes over the next twelve months for the BoE as yield expectations continue to dim. If inflation continues to slow then we could see expectations slip further as it would remove a major barrier to tightening. The upcoming budget statement from Chancellor Alistair Darling could have a greater impact on interest rate expectations. Strong measures to reduce the deficit will allow policy makers to continue adding to their asset purchase program if they deem it necessary. However, if proposed cuts lack the teeth to significantly cut into the government’s shortfall, then the MPC would put the country’s AAA rating at risk with additional stimulus measures.  Discuss this and trading ideas join the GBP/USD forum.
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FOMC Interest Rate Expectations
 
A smaller than expected decline in existing home sales of 0.6% and the Richmond Fed manufacturing index rising to 6 from 2, did very little to alter the outlook for U.S. interest rates. Any potential for an improved outlook for interest rates was squashed by Chicago Fed President Charles Evans who in speaking to reporters in Shanghai forecasted that rates would be on hold for at least the next six months. The policy maker is interpreting the FOMC’s language that rates will be low for an “extended period” to mean the next 3-4 meetings which would leave rates on hold until at least September. Indeed, markets are only pricing in a 23.3% chance of a rate hike in August with the odds of no change at 62.4%. 
 
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Risk
 
Stronger than expected results in housing and manufacturing combined with corporate solid earnings helped stocks push higher. Dow bulls continue to find fuel for their cause and may now be taking aim at testing pre-Lehman Brother levels. The psychological barrier at 11,000 could slow momentum but it is tough to argue that more upside potential exists. Considering markets at that time were already pricing in a deep recession, those valuations hold relevancy ahead of a protracted recovery. The U.S. economy may be slow to recover but few would argue that downside risks are greater at this point. Therefore, with little chance of a U.S. rate hike we could continue to see the GBP/USD hold its positive correlation with risk trends which could provide support for the pair over the medium term. Discuss this and other fundamental data join the Economics Forum. 
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