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FOREX: Pound Losses to be Limited on Dovish Bank of England Minutes

FOREX: Pound Losses to be Limited on Dovish Bank of England Minutes

2011-09-21 06:48:00
Ilya Spivak, Sr. Currency Strategist
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Talking Points

  • Dovish BoE Minutes May Not Have Lasting Impact on British Pound
  • US Dollar to Rise if Fed Reserve Opts Not to Increase Balance Sheet

Currency markets languished in quiet consolidation throughout the overnight session as traders braced for the upcoming Federal Reserve monetary policy announcement set to cross the wires at 18:15 GMT. As we discussed in detail in our fundamental trends monitor, we expect Ben Bernanke and company to disappoint hopes for another round of asset purchases (dubbed “QE3”) in favor of a less aggressive approach that eschews unconventional tools in favor a focus on more familiar variables.

A number of policy options are possible, from implementing a scheme labeled “Operation Twist” that seeks to push long-term rates lower by steering the Fed’s reinvestment of proceeds from maturing assets toward bonds of further-out maturities, to cutting the rate banks are paid on excess reserves as a way to stoke lending. Broadly speaking, anything that falls short of an outright expansion of the central bank’s balance sheet is likely to weigh on risk appetite (as well as on gold prices) and prove supportive for the US Dollar against its major counterparts.

The release of minutes from September’s Bank of England monetary policy meeting headlines the economic calendar in European hours. Traders will be keen to gauge the evolution of the dovish lean on the rate-setting MPC committee to see if perhaps another round of QE is on the horizon. A gauge tracking the pulse of UK economic data from Citigroup suggests deteriorating metrics between the August and September policy meetings may have in fact encouraged more policymakers to speak up in favor of further stimulus.

However, the same gauge points to an improvement in data flow since the meeting this month, so the implications of whatever was said at that sit-down for the probability of a dovish policy change in October may be limited. As such, any British Pound weakness following the release may prove short-lived, particularly as the Euro Zone debt crisis continues to underpin demand for Sterling as a regional alternative to the single currency following the loss of the Swiss Franc as a safe haven in the aftermath of aggressive SNB intervention.

Related: Japanese Yen Flat As FOMC Outweighs Production Gauge; New Zealand Dollar Flat Despite Disappointing Current Account Data

Asia Session: What Happened

GMT

CCY

EVENT

ACT

EXP

PREV

22:45

NZD

Current Account Balance (2Q)

-0.921B

-0.671B

-0.097B

22:45

NZD

Current Account-to-GDP Ratio (2Q)

-3.7%

-4.0%

-3.6% (R+)

22:45

NZD

Net Migration s.a. (AUG)

200

-

-160 (R+)

23:00

GBP

Nationwide Consumer Confidence (AUG)

48

47

49

23:50

JPY

Merchandise Trade Balance Total (¥) (AUG)

-775.3B

-300.0B

70.0B (R-)

23:50

JPY

Adj Merchandise Trade Balance (¥) (AUG)

-294.4B

-22.1B

-160.2B (R-)

23:50

JPY

Merchandise Trade Exports (YoY) (AUG)

2.8%

8.0%

-3.4% (R-)

23:50

JPY

Merchandise Trade Imports (YoY) (AUG)

19.2%

14.3%

9.9%

0:30

AUD

Westpac Leading Index (MoM) (JUL)

0.5%

-

0.1%

1:00

AUD

DEWR Internet Skilled Vacancies (AUG)

-0.6%

-

-0.8%

2:00

CNY

Conference Board Leading Index (JUL)

158.6

-

157.6

3:00

NZD

Credit Card Spending s.a. (MoM) (AUG)

-1.0%

-

0.9% (R-)

3:00

NZD

Credit Card Spending (YoY) (AUG)

4.7%

-

7.2% (R-)

4:30

JPY

All Industry Activity Index (MoM) (AUG)

0.4%

0.5%

2.2% (R-)

Euro Session: What to Expect

GMT

CCY

EVENT

EXP

PREV

IMPACT

7:00

CHF

Money Supply M3 (YoY) (AUG)

-

5.9%

Low

8:30

GBP

Bank of England Minutes

-

-

High

8:30

GBP

Public Finances (PSNCR) (£) (AUG)

7.0B

-5.6B

Medium

8:30

GBP

PSNB ex Interventions (AUG)

13.0B

0.0B

Medium

8:30

GBP

Public Sector Net Borrowing (£) (AUG)

11.4B

-2.0B

Medium

Critical Levels

CCY

SUPPORT

RESISTANCE

EURUSD

1.3616

1.3767

GBPUSD

1.5620

1.5772

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