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Forex: British Pound Breaks Out As BoE Maintains Current Policy, U.S. Dollar Weakness Persists
Written by article default Thursday, 07 October 2010 10:37
Talking Points* Japanese Yen: Hits Fresh 15-Year High
* Pound: BoE Maintains Current Policy
* Euro: ECB Holds Rate at 1.00%
* U.S. Dollar: Chain Store Sales, Consumer Credit on Tap
The British Pound rallied to a high of 1.6017 during the European trade as the Bank of England maintained its current policy, and the exchange rate may continue to push higher going into the end of the week as it breaks out of its narrow range. The BoE kept the benchmark interest rate at 0.50% and held its asset purchase target at GBP 200B, which led the GBP/USD to break out of its narrow range, and the exchange rate may work its way towards 1.6230-40, the 23.6% Fibonacci retracement from the 2009 low to high, as it retraces the decline from August. However, the British Pound is likely to face increased volatility over the coming weeks as the MPC is scheduled to release its policy meeting minutes on October 20, and we expect board member Andrew Sentance push for a 25bp rate hike given the stickiness in price growth.
At the same time, there remains a risk for a three-way split amongst the MPC board members as Adam Posen sees scope to expand quantitative easing further, and speculation surrounding the outlook for future policy could play an increased role in driving price action for the GBP/USD as market participants expect the Fed to ease monetary policy further over the coming months. Meanwhile, the economic docket showed industrial outputs increased 0.3% in August amid forecasts for 0.2% advance, while manufacturing expanded 0.3% after rising a revised 0.4% in the previous month. As the economic recovery in the U.K. slowly gathers pace, the central bank may hold its wait-and-see approach throughout the remainder of the year, and policy makers may see scope to start normalizing monetary policy going into 2011 as inflation continues to hold above the government’s 3% limit for inflation.
The Euro extended the rally from earlier this week and hit a fresh monthly high of 1.3995 on the back of U.S. dollar weakness, but the single-currency is likely to face increased volatility going into the U.S. trade as central bank President Jean-Claude Trichet is likely to maintain a cautious outlook for the economy. As the European Central Bank holds the benchmark interest rate at 1.00%, Mr. Trichet may talk down speculation for a rate hike at the beginning of 2011 given the uncertainties surrounding the economic outlook, and may see scope to support the economy throughout the first quarter of the following year as policy makers see the recovery tapering off. As a result, investors are likely to react to any deviation in their economic assessment as they weigh the prospects for a sustainable recovery, and dovish comments from the central bank head could spark a reversal in the EUR/USD as the recent rally remains overbought. However, as the 50-Day SMA (1.3079) approaches the 200-Day SMA at 1.3175, a bullish crossover could reinforce the sharp appreciation in the single-currency and lead the euro-dollar to retrace the decline from earlier this year.
The greenback continued to lose ground against its major counterparts, with the USD/JPY slipping to a fresh yearly low of 82.23, and the dollar may weaken further over the near-term as market participants speculate the Federal Reserve to expand monetary policy further. Beyond the ECB press conference at 12:30 GMT, the economic docket is expected to show chain store sales in the U.S. increase 2.9% in September following the 3.2% rise in the previous month, while consumer credit is forecasted to contract another $3.5B in August after falling $3.6B in the month prior. However, the U.S. dollar may show little reaction to the economic event risks as speculation surrounding monetary policy gathers pace, and the greenback may continue to trend lower against the majors as the Fed maintains a dovish tone.
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