Pound Weakens as MPC Minutes Dovish - Next Move Down?

[B]Talking Points
[/B]- Japanese Yen: BOJ votes 8-1 to keep rates steady

  • Euro: German Producer prices in line
  • Pound: Weakens as MPC minutes reveal 9-0 vote
  • Dollar: CPI on tap

Pound dropped more than 100 points from its Asian session peak of 2.0174 after the BOE minutes revealed a dovish slant by UK monetary authorities even prior to the turmoil caused by the run on Northern Rock bank. The MPC members voted 9-0 to keep rates steady at 5.75% stating, "Taking into account the data on the real economy and financial market developments, the Committee agreed that the upside risks to inflation in the August Inflation Report projections had probably receded?The outlook was now more uncertain.”
The release eliminated any hope of further tightening by the UK central bank, especially since this view was expressed before the recent turmoil in UK money markets suggesting that the bank was already looking to change it policy bias. After yesterday’s 50bp cut by the Fed the BoE certainly has plenty of time to maintain rates steady and could even entertain a rate cut of its own as interest rate differentials will remain in its favor. However, much of the upside momentum in the pound has been lost as the game in the currency market has changed from who will raise rates faster to who will lower them slower making the carry trade less attractive.
With problems in the credit markets far from over, currency traders will now focus on whether the Fed gambit will work. As a result, trading is likely to become very data dependent once more, as speculators turn away from the boarder themes of carry trade versus risk aversion and focus on the day to day results from the G-10 economies.
The turmoil of the past month have been caused as much by a crisis of confidence as by the problems in sub-prime. If Fed’s actions do indeed stabilize the equity markets, allowing economic growth to continue, the volatility in FX should contract and dollars worst declines may be over. But if Fed’s move simply becomes a band-aid, greenback weakness will continue. Today currency traders will monitor with great interest the housing starts and building permits data to see if the sector continues to be drag on overall economic performance.