British Pound Tips Higher Following BoE Rate Decision But Fails to Break 1.6600

The British pound surged higher as the Bank of England held the benchmark interest rate at 0.50% and maintained its GBP 175B asset purchase program, but the GBP/USD failed to break above 1.6600 for the third time this week.

[B][U]Talking Points[/U][/B]

· [B]Japanese Yen: Declines Against the Euro for Sixth Day[/B]

· [B]Pound: BOE Maintains Current Policy[/B]

· [B]Euro: ECB Anticipates ‘Gradual’ and ‘Uneven’ Recovery[/B]

· [B]US Dollar[/B][B]: Treasury Secretary Geithner Testifies Ahead of TARP Oversight Panel[/B]

[B][/B]

The British pound surged higher as the Bank of England held the benchmark interest rate at 0.50% and maintained its GBP 175B asset purchase program, but the GBP/USD failed to break above 1.6600 for the third time this week. The pound-dollar retraced the 50pip rally immediately following the rate decision to trade near 1.6550, and the pair may continue to hold a narrow range over the remainder of the week as investors weigh the outlook for future policy.

The BoE held borrowing costs at the record-low and kept the asset purchase program at GBP 175B as the outlook for growth and inflation improves, and the central bank is likely to hold a neutral policy stance going forward as policy makers anticipate the economy to return to growth towards the end of the year. However, as former MPC member David Blanchflower anticipates the bank to increase the scope of its asset purchases, expectations for further easing may continue to weigh on the exchange rate as market sentiment improved. At the same time, Credit Suisse overnight index swaps are up nearly 90bp in September as investors anticipate the BoE to tighten policy over the next 12 months, and increased speculation for a rate hike in the first half of 2010 may lead the GBP/USD to retrace the decline from the previous month over the near-term. Meanwhile, home prices in the U.K. rose for the second consecutive month in August, with the Halifax index rising 0.8% from the previous month amid forecasts for a 1.0% rise, and the extraordinary efforts taken on by the government may continue to shore up the housing market as economic confidence improves.

The euro weakened against the greenback for the first time this week and pulled back from the yearly high (1.4602) to hold below 1.4550, and the EUR/USD may continue to retrace the four-day rally as investors scale back long-term expectations for higher interest rates. The European Central Bank monthly report said that the economic recovery is likely to be “gradual” and “uneven” as the government stimulus fades, and forecasts inflation to remain “subdued” on the back of “sluggish demand.” At the same time, the board went onto say that price growth is “projected to turn positive again within the coming months,” and pledged to “further underpin” the economic recovery as households continue to face tightening credit conditions paired with a weakening labor market. Nevertheless, Credit Suisse overnight index swaps are up 43bp in September after rising 80bp in the previous month, and the downturn in the interest rate outlook may drag the single-currency lower over the near-term as the ECB forecasts the annual rate of inflation to hold below the 2% in 2010.

The U.S. dollar strengthened against most of its major currency counterparts during the overnight to pare the sharp decline from earlier this week, and the greenback is likely to face increased volatility going into the U.S. trade as equity futures foreshadow a lower open for the North American markets. Meanwhile, the Bank of Canada is widely expected to hold the benchmark interest rate at 0.25% as Governor Mark Carney pledges to keep borrowing costs at the record-low going into 2010, and commentary following the rate decision at 13:00 GMT is likely to move the USD/CAD as investors weigh the outlook for future policy. The BoC is likely to maintain an enhanced outlook for the economy as policy makers anticipate growth prospects to improve throughout the second-half of the year however, the persistent appreciation in the exchange rate may continue to hamper the prospects for a sustainable recovery as trade conditions remain weak. In addition, Treasury Secretary Timothy Geithner is schedule to testify in front of the TARP oversight panel at 17:00 GMT, and we may see the dollar cross rates react to the comments as tightening credit conditions paired with mounting bank failures continues to raise the risks for a slower economic recovery…

[B]Will The EUR/USD Remain Above 1.4000? Join us in the Forurm[/B]

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

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