The Bank of England held the benchmark interest rate at 0.50% and maintained its GBP 175B asset purchase program in October, with the British pound advancing for the second day to reach a high of 1.6095 during the European trade, and long-term expectations for higher borrowing costs may drive the currency higher over the near-term as the MPC expects the emergency program to end in the following month.
[U][B]Talking Points[/B][/U]
• [B]Japanese Yen:[/B][B] Advances for Fourth Day[/B]
• [B]Pound:[/B] [B]BOE Maintains Current Policy[/B]
• [B] Euro:[/B] [B]All Eyes on ECB President Trichet[/B]
• [B]US Dollar: [/B][B]ICSC Chain Store Sales on Tap[/B]
The Bank of England held the benchmark interest rate at 0.50% and maintained its GBP 175B asset purchase program in October, with the British pound advancing for the second day to reach a high of 1.6095 during the European trade, and long-term expectations for higher borrowing costs may drive the currency higher over the near-term as the MPC expects the emergency program to end in the following month. At the same time, the central bank said that the scope of the APF will be kept under review as the economic outlook remains uncertain, and the GBP/USD is likely to remain range-bound in the coming weeks as investors weigh the outlook for future policy.
Nevertheless, former BoE Deputy Governor John Gieve said the MPC may look to expand policy next month in order to avoid the risks of a “false dawn,” and speculation for further easing could lead the British pound to retrace the advance from May as Governor Mervyn King holds a cautious outlook for the economy. Moreover, former MPC dove David Blanchflower argued that the central bank needs to increase the scope of its asset purchase program to boost confidence and went onto say that the board should consider changing the discount rate, and noted that November will be “the big meeting.” Meanwhile, the overnight advance looks to have lost steam ahead of the 20-Day moving average at 1.6174, and is likely to hold the narrow range from the end of September as investors weigh the prospects for a sustainable recovery in the U.K.
The EUR/USD retraced the previous day advance and rose to a fresh weekly high of 1.4789 on the back of U.S. dollar weakness, and the pair is likely to face increased volatility going into the U.S. trade as investors await the press conference with ECB President Jean-Claude Trichet at 12:30 GMT. The European Central Bank held borrowing costs at the record-low to shore up the economy, and policy makers may hold an improved outlook for the region as Germany and France emerges from the worst economic downturn since the post-war period. Meanwhile, industrial outputs in Germany increased 1.7% in August amid expectations for a 1.8% rise, while the annual rate of production slipped 16.8% from the previous year to top expectations for a 17.0% decline, and the data reinforces an improved outlook for the region as Europe’s largest economy emerges from the worst recession since the post-war period. However, as policy makers anticipate growth prospects to remain subdued throughout the second half of the year and continue to see a risk for a protracted recovery, the ECB may hold a dovish policy stance going forward as the outlook for future growth remains highly uncertain.
The greenback weakened across the board and slipped to a fresh yearly low against the Australian and New Zealand dollar following a risk in risk appetite, and the reserve currency may continue to lose ground going into the North American trading session as the economic docket is expected to reinforce a weakening outlook for the region. Initial claims for jobless benefits are expected to fall to 540K in week ending October 3rd from 551K in the previous week, while continuing claims are expected to rise to 6105K from 6090K, and the data is likely to reinforce a weakening outlook for private spending as households continue to face a weakening labor market. At the same time wholesale inventories are expected to contract 1.0% in August after slipping 1.4% in the previous month, while chain store sales are projected to weaken for the fourteenth month in September, and businesses may continue to scale back on production and employment over the coming months as they face fading demands from home and abroad.
[B]Will The EUR/USD Remain Above 1.4000? Join us in the [/B][B]Forurm[/B]
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Forex Technical and Fundamental Forecasts for October
[I]To discuss this report contact David Song, Currency Analyst: <[email protected]>[/I]
