With only housing data on the US docket for today, the potential for more quantitative easing as well as an S&P debt downgrade in the UK are acting as today’s most noteworthy market-moving factors.
GBPUSD was hammered in early European trading today when the release of the Bank of England (BoE) minutes revealed that the Monetary Policy Committee (MPC) vote on increasing QE saw margin rise to 6-3, indicating that UK monetary policymakers may be moving closer to additional quantitative easing. BoE Governor Mervyn King joined members Paul Fisher and David Miles in voting to increase QE by another GBP 25 billion, to GBP 400 billion.
The news instantly sent cable tumbling through the 1.5400 level and pushed all the way lower to 1.5305 by morning London trading as traders dumped the unit wholesale on fears of further devaluation by the BoE. The minutes showed that the Committee considered cutting rates, but noted that further monetary stimulus alone was insufficient in propping up demand.
The UK monetary officials are clearly frustrated by the lack of growth in the economy and appear to be running out of viable policy options. Data showed that in Q4 2012, the UK economy registered its third quarterly contraction since the credit crunch of 2008 and currently shows no signs of gaining traction.
Cable was further hurt by rumors that Standard & Poor’s (S&P) may downgrade UK sovereign debt. Last December, the agency affirmed the UK's AAA status but revised the outlook to negative. The ratings agency refused to confirm speculation that the UK rating may be lowered further, but the currency markets reacted nevertheless.
See also: New S&P Downgrade Rumors Rock EUR/GBP
So far, cable has been able to find bids ahead of the 1.5300 barrier, but the outlook for the pound remains extremely bearish with every rally now likely a selling opportunity, as sentiment will not shift until currency markets see some evidence of pick-up in UK economic activity.
In New Zealand, the kiwi was rocked for more than a penny after commentary from Reserve Bank of New Zealand (RBNZ) chief Graeme Wheeler suggested that the New Zealand dollar was overvalued and that the central bank stood ready to intervene, if necessary. Mr. Wheeler wanted investors to know that the kiwi was not a one-way bet, referring to the currency’s recent strength. The news helped push the unit to a low of 8377 after it suffered earlier losses on reports that China may have destroyed 100 kg of milk powder on fears that it was contaminated. The New Zealand Fonterra Corporation denied those reports, and the kiwi recovered.
Today's action, however, suggests that NZ monetary authorities are becoming increasingly sensitive to the strength of the exchange rate, especially as the kiwi nears the key 8500 level, and therefore, authorities may become more aggressive in their actions should the unit push higher through those levels.
In North America today, the data calendar is relatively light, with only housing data and PPI on the docket. USDJPY remains subdued in its 93.00-94.00 range, but if the housing numbers surprise to the upside, the pair could try to make another run at the 94.00 level as the day progresses.
More: See the complete Economic Calendar
By Boris Schlossberg of BK Asset Management