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Forex: British Pound Rally To Consolidate Ahead Of BoE Minutes, U.K. Budget Statement

Forex: British Pound Rally To Consolidate Ahead Of BoE Minutes, U.K. Budget Statement

2011-03-21 13:30:00
David Song, Currency Strategist
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Talking Points

  • British Pound: Extends Rally, Eyes 1.6400
  • Euro: Holds Steady Ahead Of ECB President Trichet’s Testimony
  • U.S. Dollar: Existing Home Sales On Tap

The short-term rally in the British Pound gathered pace on Monday, with the GBP/USD advancing to a high of 1.6290, and the sterling may continue to retrace the decline from earlier this month as policy makers in the U.K. hold an enhanced outlook for the region. Bank of England Chief Economist Spencer Dale said the economic recovery in Britain is “set to continue” as the banking sector improve, and went onto say that market participants expect to see a faster pace of monetary tightening as the risk for inflation intensifies. With consumer prices expected to breech 4 percent in February, the BoE meeting minutes due out on Wednesday could reveal a growing shift within the MPC, and hawkish comments from the central bank is likely to generate a bullish outlook for the GBP/USD as investors speculate the central bank to gradually normalize monetary policy over the coming months.

As price growth in the U.K. continues to gather pace, the GBP/USD may make another run at 1.6400 over the next 24 hours of trading, but the exchange rate may consolidate going into the middle of the week as the government takes extraordinary steps to manage its public finances. In turn, the market reaction to the BoE minutes could be short-lived as Chancellor of the Exchequer George Osborne is scheduled to deliver his budget statement at 12:30 GMT, and U.K. policy makers may increase their efforts to curb the budget deficit even as the tough austerity measures dampens the outlook for future growth. In turn, the MPC could be forced to support the real economy throughout the first-half of the year, and the downturn in interest rate expectations may continue to bear down on the exchange rate as the central bank maintains its wait-and-see approach. According to Credit Suisse overnight index swaps, investors see borrowing costs in the U.K. rising by 50bp over the next 12 months, which compares with expectations for 75bp worth of rate hikes earlier this month, and the near-term rally in the GBP/USD may taper off going into the middle of the week as currency traders weigh the prospects for future policy.

The Euro managed to tip higher during the overnight trade, with the exchange rate rising to a fresh yearly high of 1.4192, and the single-currency may face increased volatility later today as European Central Bank President Jean-Claude Trichet is set to testify in front of the European Parliament at 15:30 GMT. As market participants expect the ECB to deliver a 25bp rate hike next month, hawkish comments from the central bank head may fail to generate a bullish reaction in the single-currency, and market participants turn their attention to the outlook for future growth as the devastating earthquake in the Asia/Pacific region dampens the prospects for global trade. Nevertheless, the EUR/USD certainly looks due for a correction as the relative strength index continues to come off its highs, but the rebound in market sentiment may push the exchange rate higher throughout the North American trade as risk trends continue to dictate price action in the currency market.

The greenback weakened against most of its major counterparts following the rise in risk appetite, and the dollar may continue to lose ground during the U.S. session as the economic docket is expected to reinforce a weakened outlook for the world’s largest economy. Existing home sales are projected to contract 4.2% in February to an annualized pace of 5.13M, and the ongoing weakness within the private sector is likely to instill a dovish outlook for future policy as the Federal Reserve maintains its pledge to keep borrowing costs exceptionally low for an extended period of time.

Will the EUR/USD Continue to Retrace the Decline From November? Join us in the Forum

Related Articles: Weekly Currency Trading Forecast

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

FX Upcoming

Currency

GMT

EST

Release

Expected

Prior

USD

12:30

08:30

Chicago Fed. Nat. Activity Index (FEB)

--

-0.16

USD

14:00

09:00

Existing Home Sales (FEB)

5.11M

5.36M

USD

14:00

09:00

Existing Home Sales (MoM) (FEB)

-4.7%

-2.7%

Currency

GMT

Release

Expected

Actual

Comments

GBP

00:01

Rightmove House Prices (MoM) (MAR)

--

0.8%

Falls sharply from year’s high in Feb.

GBP

00:01

Rightmove House Price (YoY) (MAR)

--

0.9%

Fastest pace since Nov. ‘10

NZD

02:00

Credit Card Spending (MoM) (FEB)

--

-0.3%

2nd contraction in last 3

NZD

02:00

Credit Card Spending (YoY) (FEB)

--

5.3%

Eases off multi-month high

CHF

08:00

Money Supply M3 (YoY) (FEB)

--

7.7%

Fastest growth since record high in Nov. ‘09

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