Pound Pushes Higher as it De-Couples from Risk, Ignores Yield Expectations
The Pound continues to trend higher as the improving outlook for Europe has bolstered the British unit. A successful Spanish bond auction has added to signs that a market exists for European sovereign paper, reducing concerns that the debt crisis will become a contagion that could spread to the U.K. Stronger than expected earnings from JP Morgan Chase also aided the currency whose country boasts one of the major financial centers in the world. The GBP/USD continues to push higher despite a turn in risk appetite ion the back of disappointing U.S. fundamental data. Indeed, we have started to see the pair de-couple from risk with its correlation down to 44% from 57% a month ago, making it more resilient to broader trends.
BoE Interest Rate Expectations
Bank of England member David Miles commented that it isn’t time to start tightening monetary policy as the banking system remains fragile and the potential for the European debt crisis to threaten the country’s recovery still exists. Meanwhile, British policy maker Andrew Sentance has been pushing for the removal of stimulus and a rate hike in order to combat inflation which remains above the central bank’s 3.0% threshold. Markets still favor the MPC remaining on hold with overnight index swaps pricing in only 25.9 bps of tightening over the next twelve months. Therefore, we could see sterling upside limited without a brighter outlook for yields. Discuss this and trading ideas join the GBP/USD forum.
FOMC Interest Rate Expectations
The outlook for U.S. growth took a hit today as manufacturing readings from the New York and Philadelphia disappointed, raising concerns the sector was stagnating. Additionally, a sharp drop in the pace of producer prices to 2.8% from 5.3% fueled concerns over deflation and future profits. The disappointing report came on the heels of yesterday’s FOMC minutes which showed that policy maker saw an increased risk for deflation. A similar deceleration in the consumer price index on July 16th would significantly dim the outlook for a rate hike. Fed Fund futures are only giving a 9.3% of an increase in interest rates in September.
U.S. equity markets were weighed by growth and deflation concerns which overshadowed strong earnings from JP Morgan Chase. If consumer prices point toward increased deflation risks then we could see fundamentals drive prices lower on dimming profit expectations. Bank of America and GE are next to report and if they continue the streak of solid earnings, bullish sentiment could return if the inflation report fails to ring alarms. A descending trend line is providing resistance and increases the downside potential for equities. Discuss this and other fundamental data in the Economics Forum.
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