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British Pound Looks to FOMC Minutes, EU FinMin Summit for Direction

By , Currency Strategist
07 July 2012 07:10 GMT
British_Pound_Looks_to_FOMC_Minutes_EU_FinMin_Summit_for_Direction_body_Picture_5.png, British Pound Looks to FOMC Minutes, EU FinMin Summit for Direction

Fundamental Forecast for British Pound: Neutral

The British Pound remains sensitive to risk sentiment trends, with GBPUSD showing a firm correlation with the MSCI World Stock Index. In the aftermath of last week’s disappointing US jobs report and underwhelming stimulus efforts from the ECB and the BOE, this puts the spotlight on minutes from June’s FOMC outing amid hopes the Fed will deliver some relief. Although Ben Bernanke and company opted not to introduce QE3 last month, traders will be keen to gauge the degree to which such an option entered into the conversation to guide expectations for a possible expansion of the balance sheet to be unveiled in the coming months.

On balance, the utility of another QE program seems highly suspect. Indeed, with US Treasury yields already so low that after adjusting for inflation, real rates are in negative territory out to the 10-year maturity, it seems unlikely that a further push lower will materially encourage those not borrowing to do so. The Fed is surely not oblivious to the limitations of more QE, but it is equally sensitive to the fact that a strong signal against stimulus may trigger pandemonium across financial markets. That means the door to further easing is likely to be kept open, at least rhetorically. With that in mind, language perceived as increasing the likelihood of added accommodation is likely to boost risk appetite and with it the Pound. Needless to say, the inverse scenario is likewise the case.

Besides investors’ yearning for looser monetary conditions, the Eurozone debt crisis is set to return to the forefront as the currency bloc’s finance ministers convene for a meeting on Monday. The sit-down is expected see officials begin implementation of June’s EU leaders’ summit framework. While little is likely to be achieved on longer-term issues like joint bank governance and the expansion of EFSF/ESM bailout fund powers, the Spanish bank rescue is likely to figure prominently into the proceedings. Details of the effort are expected to be ratified at the sit-down. The British Pound continues to be a beneficiary of regional haven flows at times of rising concern about the Euro area, meaning an outcome perceived as disappointing by investors may boost the UK currency.

DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.
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07 July 2012 07:10 GMT