The British Pound retraced the overnight advance and slipped back below the 1.5700 level as the Bank of England lowered its outlook for growth and inflation, and the exchange rate may maintain the downward trending channel from the November high (1.6879) as the central bank expects price growth to fall back below the 2% target.
[U][B]Talking Points[/B][/U][B]
• Japanese Yen: Slightly Higher Against Higher-Yielding Counterparts
• Pound: BoE Holds Dovish Outlook, Maintains Option for Further Easing
• Euro: Germany Considers Bailout Options for Greece
• US Dollar: Trade Balance on Tap
British Pound Tumbles Lower on BoE Comments, Euro Maintains Channel Formation[/B]
The British Pound retraced the overnight advance and slipped back below the 1.5700 level as the Bank of England lowered its outlook for growth and inflation, and the exchange rate may maintain the downward trending channel from the November high (1.6879) as the central bank expects price growth to fall back below the 2% target. The BoE said the recovery was “somewhat weaker” than previous expects and sees the ongoing slack in the private sector to weigh on price pressures over the medium-term, and forecasts GDP to expand approximately 3.2% in the second-quarter of 2011 as the expansion in monetary and fiscal policy continues to feed through the real economy.
At the same time, the central bank expects to see a moderate recovery this year and saw the downside risks for growth and inflation diminishing, but anticipates inflation to undershoot the target as price growth is likely to average 1.2% over the next two-years. The BoE sees the CPI topping out around 3.3% in the first-quarter, which will certainly lead Governor Mervyn King to write a letter to Chancellor of the Exchequer Alistair Darling, and reiterated that it is “far too soon to conclude” its asset purchase program. In addition, Governor King expects the U.K. to maintain its AAA credit rating and said that the BoE is prepared to shift gears as the central bank aims to balance the risks for growth and inflation. Meanwhile, the economic docket reinforced an improved outlook for the region as industrial outputs increased 0.5% in December to top forecasts for a 0.2% rise, while manufacturing advanced 0.9% during the same period after rising a revised 0.2% in the previous month.
The Euro weakened against the greenback and slipped to a low of 1.3733 during the overnight trade, and we may see the exchange rate maintain the downward trending channel from the January high (1.4581) as the U.S. dollar loses its appeal as a funding currency. Nevertheless, an unnamed official told reporters leaders of the European Union will discuss a possible bailout for Greece tomorrow as the group looks to conclude its summit, while Germany Finance Minister Wolfgang Schaeuble told policy makers that the country may go beyond loan guarantees in order to support the euro-region as a whole. At the same time, European Central Bank board member Yves Mersch held a dovish outlook for inflation and said that the deterioration in the labor market continues to weigh on price growth, but said that the central bank should be mindful and “not underestimate the risks of prolonged excess liquidity” as the economy recovers from the worst recession since the post-war period.
U.S. dollar price action was mixed overnight, with the USD/JPY pulling back from the high (90.02) to remain relatively flat on the day, and the greenback certainly appears to be losing its appeal as a funding currency as market participants speculate the Federal Reserve to normalize policy this year. Nevertheless, the budget deficit for the world’s largest economy is expected to narrow in December, with the balance forecasted to increase to -$35.8B from -36.4B in the previous month, and the data is likely to encourage an improved outlook for future growth as the nation emerges from the recession. Meanwhile, Fed Chairman Ben Bernanke and Treasury Secretary Timothy Geithner were scheduled to testify in front of the House Financial Services Committee later today, but the hearing has been postponed due to the heavy snowfall in the North Eastern states.
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Forex Strategy Outlook: US Dollar Likely to Move Sharply Against Euro[/B]
[I]To discuss this report contact David Song, Currency Analyst: <[email protected]>[/I]
