Minutes from July’s Bank of Japan policy meeting were nearly identical to the rhetoric presented in June: the bank does not see inflation in commodities spilling over into wages and is therefore choosing to focus on sagging growth rather than the price level. Preliminary estimates of second-quarter UK Gross Domestic Product are the clear focus for tonight’s European session. Expectations call for growth to slow to an annualized 1.5%, the slowest since 1993.
[B][U]Key Overnight Developments[/U]
• Bank of Japan focused on economic growth, unlikely to act on rates
• Euro, Sterling back off from NY session highs[/B]
[B][U]Critical Levels[/U][/B]
The Euro eased back below the 1.49 level in overnight trading. DailyFX Senior Currency Strategist Jamie Saettele expects the Euro to correct to at least 1.4980 before downside momentum resumes. Sterling oscillated in a wide 50-pip range below the 1.88 level. Support is seen at 1.8608 with resistance at 1.8720.
[B][U]Asia Session Highlights[/U][/B]
The overnight calendar was generally uneventful. Minutes from July’s Bank of Japan policy meeting were nearly identical to the rhetoric presented in June: the bank does not see inflation in commodities spilling over into wages and is therefore choosing to focus on sagging growth rather than the price level. The bank described the pace of expansion as “sluggish” for the first time in a decade, firmly suggesting that interest rates will not be going up in the near future.
[B][U]Euro Session: What to Expect[/U][/B]
Preliminary estimates of second-quarter [B]UK Gross Domestic Product[/B] are the clear focus for tonight’s European session. Expectations call for growth to slow to an annualized 1.5%, the slowest since 1993. That said, the Bank of England is unlikely to act on rates in the near term. As pointed out by DailyFX Currency Strategist Terri Belkas, the minutes of the last policy meeting see bank officials acutely worried about inflationary pressure and suggest “the BOE will seek to leave rates steady, rather than raise rates. While overnight index swaps may be pricing in over 75bps worth of rate cuts within the next 12 months, these moves may not occur until 2009.” A stronger-than-expected retail sector may help the bank hold off a bit longer. Indeed, yesterday saw Retail Sales trumped expectations to print at 2.1% in the year to July versus expectations of 1.8%. Still, receipts slowed down from the preceding month (2.2%), with little doubt about continuing deterioration in the UK for the medium term. To that effect, the question is not whether the BOE will need to cut interest rates, but when.
The [B]Euro Zone Current Account[/B] metric is likely to sink deeper into deficit in June as weakening global demand and a stronger Euro likely dampened exports all the while higher oil prices inflated inbound shipment volumes. Indeed, we saw the Trade Balance deficit expand to the widest in 3 years in the same reference period. The capital side of the equation is unlikely to be supportive: stocks and bonds both fell in June, while the Euro remained generally range-bound. This means the 15-nation bloc is unlikely to have attracted enough capital to finance the trade deficit, sending the Current Account metric into negative territory.
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