The pound has been stuck in a tight range between 1.6970 and 1.7010 throughout overnight trading as markets have been quiet across the board ahead of upcoming event risk. The BoE will make a determination on their asset purchase program today following their interest rate policy decision at 11:00 GMT where they are expected to keep the benchmark rate unchanged at 0.50%.
[B]Talking Points
• Japanese Yen: Under Pressure On Positive Earnings
• Pound: BoE To Rule On QE
• Euro: ECB Rate Decision Ahead
• US Dollar: Initial Jobless Claims On Tap
Pound, Euro Consolidate Ahead Of Rate Decisions, Will Policy Makers Follow China’s Hawkish Lead?[/B]
The pound has been stuck in a tight range between 1.6970 and 1.7010 throughout overnight trading as markets have been quiet across the board ahead of upcoming event risk. The BoE will make a determination on their asset purchase program today following their interest rate policy decision at 11:00 GMT where they are expected to keep the benchmark rate unchanged at 0.50%. The central bank has already put to work £125 billion of the £150 billion that was approved and the possibility exists that they will use the remaining balance. However, improvements in the housing, manufacturing and service sectors has raise hopes that the economy is on the verge of a recovery which could lead the MPC to refrain from adding additional measures as it did in July. If this is the case then we could see continued sterling support, which has held onto its gains despite a pullback in risk appetite.
The Euro has also been relegated to a range of 1.4390-1.4420 as the ECB will also announce their rate decision. The central bank is widely expected to keep rates at their record low 1.00%. Unlike the BoE, its European counter part is at the beginning of its 60 billion euro asset purchase program. The typically measured committee is expected to remain on hold until they can further assess the impact of their actions. Positive corporate earrings from Unilever and other European blue chip names has kelp lift equity markets and the EUR/JPY as the yen has come under pressure on pick up in risk appetite.
The Chinese central bank raised interest rate expectations today when it stated that it would fine tune credit policy, which could be the beginning of hawkish talk from other policy makers. Indeed, we saw the RBA change their bias to neutral and with the unexpected dump in employment in the country, interest rate expectations have soared. We could see concerns rise that that policy makers may tighten too soon which could start to weigh on risk appetite. Chinese stocks fell on the statements today and we could see a similar reaction if the ECB and BoE follow suit. Conversely, a hawkish tone may send a signal that a bottom is in place and that a return to growth is around the corner adding to recent risk appetite.
The dollar has held its ground despite the higher European equity markets ahead of the policy decisions. Additional event risk today will come from initial jobless claims which are forecasted to rise for a second week to 595K from 584K. Last week’s uptick didn’t raise concerns as it was attributed to auto industry layoffs working through the numbers and the fact that they remained below 600,000 was viewed as a positive. However, after the disappointing ADP report another increase could dim expectations for the non-farm payroll report and weigh on risk appetite adding greenback support. ICSC Chain store sales will also be closely watched as concerns over future consumer consumption heighten. Demand is expected to have fallen for a 12th straight month which should lower profit expectations and provide dollar support.
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To discuss this report contact John Rivera, Currency Analyst: <[email protected]>
