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Pound Ignores Risk Trends As BoE Uncertainty Puts Focus on Fundamentals

Pound Ignores Risk Trends As BoE Uncertainty Puts Focus on Fundamentals

2010-07-21 19:48:00
John Rivera, Currency Analyst
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GBP/USD

The GBP/USD fell sharply in early trading with the weakness blamed on an algorithm gone wrong, only to immediately retrace the move. However, we have seen the pair re-test the low as the sterling has been weighed by the minutes from the BoE’s last meeting, as policy makers debated additional stimulus measures. U.K. fundamentals have increased in importance as risk has loosened its grip on price action. Indeed, the pound/dollar’s correlation with risk has weakened to 37% from 54% a month ago opening the door for upcoming retail sales and GDP figures to impact direction.

PD-10-07-21-01

BoE Interest Rate Expectations

The MPC voted to keep their benchmark rate and asset purchase program on hold at their last policy meeting with a 7-1 tally. Member Andrew Sentance pushed for a rate hike as he sees the economy improving and inflation risks increasing which could threaten the recovery with consumer prices already above the central bank’s 3.0% threshold. Indeed, the BoE did acknowledge that inflation has remained persistently high but the consensus is that it will fall over time as the outlook for growth has dimmed. Markets continue to see very little chance of tightening beginning over the near-term as overnight index swaps are only pricing in 23 bps of rate increases over the next year. Strong retail sales and GDP readings have the potential to fuel yield expectations on the back of comments from BoE member Adam Posen that a rate hike by the end of the year can’t ruled out. Discuss this and trading ideas join the GBP/USD forum.

PD-10-07-21-02

FOMC Interest Rate Expectations

Fed chairman Ben Bernanke in his semiannual monetary policy report to Congress stated that policy makers stand ready to add further stimulus if conditions deteriorated. He reiterated that he FOMC continues to see the need for rate to remain exceptionally low for an extended period. The head of the central bank also stated that a weak job market will remain a drag on consumer spending with inflation remaining subdued over the next several years. On the positive side the chairman sees significant improvement in the banking system and unemployment gradually declining to 7 to 7.5 percent by the end of 2012. Regardless, the comments should only add to the diming outlook for interest rates with markets now only giving an 11.3% chance of an increase in December.

PD-10-07-21-03

Risk

U.S. equity markets tumbled following Fed Chairman Bernanke’s comments as markets were looking for a rosier outlook. The dovish remarks offset positive earnings reports from Morgan Stanley, Wells Fargo and Coca Cola. Earnings will take center stage tomorrow with several blue chip names reporting including AT&T, 3M, Caterpillar, Eli Lilly and UPS. Although the results are expected to be positive signs that revenues are slowing could sink stock markets. The Dow is facing trend lien resistance and failure to break above increases downside risks. Discuss this and other fundamental data in the Economics Forum.

PD-10-07-21-04

To discuss this report or be added to the email list contact John Rivera, Currency Analyst: instructor@dailyfx.com

DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.

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