British Pound Falters Following BoE King's Comments, Euro Rallies as Business Confide

The British pound weakened across the board following dovish commentary from Bank of England Governor Mervyn King, and the currency may continue to face increased selling pressures going into the U.S. trade as investors speculate the central bank to cut the deposit rate for commercial banks.

[U][B]Talking Points[/B][/U][B]
• Japanese Yen: Bounces Back Across the Board
• Pound: Weighed by BoE King’s Comments
• Euro: Business Sentiment Improves for Sixth Month
• US Dollar: Existing Home Sales on Tap
[/B]

The British pound weakened across the board following dovish commentary from Bank of England Governor Mervyn King, and the currency may continue to face increased selling pressures going into the U.S. trade as investors speculate the central bank to cut the deposit rate for commercial banks. The Daily Telegraph said policy makers have invited economists to a ‘crisis meeting’ next week to discuss the depreciation in the exchange, along with the BoE’s asset purchase program, and it looks as though the markets have begun discounting expectations for further easing as the banking system remains weak.

Cable slipped to a fresh yearly low against the euro, and remains weighed against the greenback, with the GBP/USD poised to test the weekly low at 1.6134. Meanwhile, BoE Governor Mervyn King said that the depreciation in the exchange has been “very helpful” to stabilize the economy, and stated that “the UK is pretty well set for a recovery” as the government takes unprecedented steps to stem the downside risks for growth and inflation. However, the central bank head noted that the financial system “is not in good shape” and said “it will take a long time before the balance sheets of the banks are fully repaired.” At the same time, Mr. King warned that the government will need a “a credible plan for how the budget deficit will be reduced” as he expects to see a slow and steady recovery going forward, and fears of protracted growth may continue to weigh on the exchange rate as investors weigh the prospects for a sustainable recovery.

The euro advanced against the greenback to retrace the previous day’s decline, but the overnight rally looks to be losing steam ahead of 1.4800, and the pair may fall back during the US trade as the RSI approaches overbought territory. Nevertheless, business confidence in Germany improved for the sixth consecutive month in September, with the headline reading increasing to 91.3 from 90.5 in the previous month amid expectations for a rose to 92.0. At the same time, the IFO’s gauge for future expectations increased to 95.7 from 95.0, with the current assessment advancing to 87.0 from a revised reading of 86.2 in August, and the data encourages an improved outlook for the nation as the economy emerges from the worst recession since the post-war period. As Bundesbank President Axel Weber holds an enhanced outlook for the region and projects economic activity to fall at a slower pace than initially expected, businesses confidence is likely to improve throughout the second half of the year as policy makers anticipate the economy to return to growth in 2010.

US dollar price action was mixed overnight as the reserve currency weakened against most of its currency counterparts however, the greenback managed to rally against the loonie as Canadian policy makers continued to see a risk for a slower recovery following the marked appreciation in the exchange rate. Meanwhile, economists forecast existing home sales in the US to increase for the fifth consecutive month in August following the tax-credit for first time homebuyers, with the annualized rate projected to increase to 5.35M from 5.24M in the previous month, and the data may drive the greenback higher as policy makers see the economy emerging from the recession.

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[I]To discuss this report contact David Song, Currency Analyst: <[email protected]>[/I]