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Forex: British Pound Consolidates As BoE Curbs Rate Expectations, All Eyes On FOMC Minutes

Forex: British Pound Consolidates As BoE Curbs Rate Expectations, All Eyes On FOMC Minutes

2011-02-16 13:30:00
David Song, Currency Strategist
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Talking Points

  • Japanese Yen: Mixed Against Majors
  • British Pound: BoE Curbs Growth Outlook, Talks Down Rate Hike
  • Euro: ECB To Avoid Second-Round Effects
  • U.S. Dollar:Housing Starts, FOMC Minutes on Tap

The British Pound pared the previous day’s advance as the Bank of England curbed its outlook for future growth, and the GBP/USD may continue to consolidate throughout the North American trade as interest rate expectations falter. The BoE lowered its growth forecast following the unexpected contraction in the fourth quarter, and expects to see a gradually recovery unfold this year given the substantial margin of slack within the real economy. At the same time, the central bank anticipates price pressures to ease over the medium-term, but warned that the risk for price growth remains “skewed to the upside” as policy makers anticipate inflation to hold above the 2 percent target until the second-half of 2012.

Moreover, BoE Governor Mervyn King said price growth will rise “sharply” in the first-half of 2011 on the back of higher energy prices, but pledged to take the appropriate steps to balance the risks for the region as the central bank aims to encourage a sustainable recovery. Mr. King noted that the central bank will look to raise the benchmark interest rate off the record-low when it prepared to normalize monetary policy, but went onto say the MPC has yet to lay the ground work to raise borrowing costs as the economic outlook remains clouded with high uncertainty. As the BoE struggles to balance the risks for growth and inflation, we are likely to see the central bank maintain its wait-and-see approach throughout the first-half of the year, and the GBP/USD may trend sideways over the near-term as it maintains the range from earlier this month. However,investors may continue to raise bets for a rate hike later this year given the stickiness in price growth, and the British Pound may continue to push higher over the near-term as interest rate expectations gather pace.

The Euro fell back from a fresh weekly high of 1.3569, but the single-currency may regain its footing during the U.S. trade as the European Central Bank holds a hawkish outlook for future policy. ECB President Jean-Claude Trichet said that it is essential to avoid second-round effects according to an interview with a German newspaper, and pledged to take the appropriate steps to ensure price stability as inflation breeches the 2 percent target for the second month. Despite the hawkish comments, investors appear to be unconvinced as European policy makers struggle to address the sovereign debt crisis, and the Governing Council could be forced to support the real economy throughout 2011 as the region faces an uneven recovery. In turn, the small rebound in the EUR/USD could be short-lived, and the exchange rate may continue to push lower over the remainder of the week as the risk for contagion bears down on market sentiment.

U.S. dollar price action was mixed once again on Wednesday, with the USD/JPY holding within the previous day’s range, and the greenback may hold steady going into the North American trade as investors wait for the FOMC meeting minutes due out at 19:00 GMT. In turn, market participants may show little to no reaction to the slew of event risks scheduled for the early morning trade, but a rebound in housing starts could spark a bullish reaction in the U.S. dollar as the outlook for future growth improves. We are likely to see the Fed maintain a cautious outlook for the economy as households cope with the protracted recovery in employment paired with the depressed housing market, and dovish comments from the central bank could bear down on the exchange rate as investors speculate the FOMC to expand monetary policy further this year.

Will the EUR/USD Continue To Retrace The Advance From Earlier This Year? Join us in the Forum

Related Articles: Forex Weekly Trading Forecast - 02.14.2011

To discuss this report contact David Song, Currency Analyst: dsong@dailyfx.com

FX Upcoming

Currency

GMT

EST

Release

Expected

Prior

USD

13:30

08:30

PPI (MoM) (JAN)

0.8%

1.1%

USD

13:30

08:30

PPI (YoY) (JAN)

3.5%

4.0%

USD

13:30

08:30

PPI Ex-Food & Energy (MoM) (JAN)

0.2%

0.2%

USD

13:30

08:30

PPI Ex-Food & Energy (YoY) (JAN)

1.2%

1.3%

USD

13:30

08:30

Building Permits (JAN)

565K

627K

USD

13:30

08:30

Housing Starts (JAN)

540K

529K

CAD

13:30

08:30

Manufacturing Shipments (MoM) (DEC)

2.5%

-0.8%

CAD

13:30

08:30

Intl Securities Transactions (CAD) (DEC)

--

8.005B

CAD

13:30

08:30

Leading Indicators (MoM) (JAN)

--

0.5%

USD

14:15

09:15

Capacity Utilization (JAN)

76.4%

76.0%

USD

14:15

09:15

Industrial Production (JAN)

0.5%

0.8%

USD

19:00

14:00

Federal Open Market Committee Meeting Minutes

--

--

Currency

GMT

Release

Expected

Actual

Comments

AUD

23:30

Westpac Leading Index (MoM) (DEC)

--

0.8%

Rebounds from flat reading in Nov.

JPY

23:50

Tertiary Industry Index (MoM) (DEC)

-0.6%

-0.8%

3rd contraction in last 6

AUD

00:00

DEWR Skilled Vacancies (MoM) (FEB)

--

-1.2%

Pace of contractions continues to ease after peaking in Nov ‘10

GBP

00:01

Nationwide Consumer Confidence (JAN)

50

47

Falls back after climbing smartly in Dec. ‘10

AUD

00:30

New Motor Vehicle Sales (MoM) (JAN)

--

-1.9%

2nd contraction in last 6

AUD

00:30

New Motor Vehicle Sales (YoY) (JAN)

--

-2.8%

3rd straight contraction

EUR

07:00

EU-25 New Car Registrations (JAN)

--

-1.4%

10th straight contraction

GBP

09:30

Jobless Claims Change (JAN)

-3.0K

2.4K

Rises as public cuts begin

GBP

09:30

Claimant Count Rate (JAN)

4.5%

4.5%

Unch. for 8th month

GBP

09:30

ILO Unemployment Rate (JAN)

4.5%

4.5%

Hold steady for third month

GBP

09:30

Average Weekly Earnings (3MoY) (DEC)

2.0%

1.8%

Worst since Aug.

GBP

09:30

Weekly Earnings exBonus (3MoY) (DEC)

2.3%

2.3%

Remains at 2010 high

EUR

10:00

Italian Current Account (euros) (DEC)

--

-5382M

5th straight deficit

USD

12:00

MBA Mortgage Applications (FEB 11)

--

-9.5%

Contracts for second week

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