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Forex: British Pound Weighed By Growth Concerns, U.S. Dollar At Crossroads Ahead of FOMC Rate Decision
Written by article default Tuesday, 02 November 2010 12:48
Talking Points* Japanese Yen: Weighed By Risk Appetite
* British Pound: Construction Expands At Slowest Pace in Eight Months
* Euro: Manufacturing Expands At Faster Pace in October
* U.S. Dollar: Risk Sentiment To Drive Price Action On Light Batch Of Event Risks
The British Pound slipped to a low of 1.5960 during the European trade as the economic docket reinforced a weakened outlook for future growth, but the light economic calendar scheduled for the North American session could lead the exchange rate to hold a narrow range throughout the day as investors weigh the outlook for future policy. The Bank of England is widely expected to maintain its current policy later this week as it aims to balance the risks for the region, and the British Pound may show a bullish reaction to the rate decision as market participants scale back expectations for further easing. Former BoE board member John Gieve said he would vote to hold the benchmark interest rate at 0.50% and maintain the asset purchase target at GBP 200B if he were on the MPC, and noted that inflation expectations are not “becoming de-anchored in any way” during a conference in London. At the same time, former BoE member Rachel Lomax encouraged the central bank to maintain its neutral policy stance going forward as the U.K. faces a “slow and bumpy” recovery, and went onto say that the tightening in fiscal policy will bear down on the recovery as the new coalition in Britain aims to balance the budget deficit.
As the economic outlook remains clouded with uncertainties, the MPC is likely to maintain a cautious tone for the region, but we expect BoE board member Andrew Sentance to push for a 25bp yet again as inflation continues to hold above the government’s 3% limit for price growth. As a result, the GBP/USD may show a bullish reaction to the BoE rate decision even though we expect the MPC to refrain from releasing a policy statement, and the exchange rate may make a run at 1.6220-40, the 23.6% Fib from the 2009 low to high, as the central bank maintains a wait-and-see approach. Meanwhile, the economic docket showed construction in the U.K. expanded at the slowest pace in eight-months, with the PMI reading falling back to 51.6 in October from 53.8 in the previous month, and the central bank may look to maintain the expansion in monetary policy throughout the beginning of 2011 given the ongoing slack within the real economy.
The Euro rallied to a high of 1.3992 as manufacturing in the Euro-Zone expanded at a faster during the month of October, but we are likely to see the EUR/USD trade within the narrow range carried over from the previous week as investors wait for the Fed and the European Central Bank interest rate decisions due in the days ahead. The final PMI reading for the euro-area unexpectedly increased to 54.6 from an initial forecast of 54.1 for the month of October, while the gauge for Germany advanced to 56.6 from 56.1 as the region continues to benefit from the rise in global trade. As growth prospects improve, the Governing Council may revise its economic assessment later this week even as market participants expect the central bank to hold the benchmark interest rate at 1.00%, and ECB President Jean-Claude Trichet may see scope to reestablish the exit strategy over the coming months as policy makers expect to see a sustainable recovery throughout Europe.
U.S. dollar price action was mixed on Tuesday, with the USD/JPY rallying to a high of 80.95, and we are likely to see risk developments dictate price action throughout the day as the economic docket remains fairly light for the North American trade. With equity futures foreshadowing a higher open for the U.S. market, the rebound in risk appetite could weigh on the greenback as investors move into higher-yielding currency, but the major currencies may hold steady throughout the day as the Fed is scheduled to announce its interest rate decision tomorrow at 18:15 GMT. Market participants speculate the FOMC to expand monetary policy further this month, with economists forecasting a $500B expansion in quantitative easing, and the dollar is likely to face increased volatility following the rate decision as investors weigh the prospects for future policy.
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