Important statements from the Bank of England and the Federal Reserve later on today will play an important role in driving FX sentiment this week. Both the Pound and the US Dollar traded negatively yesterday as investors mulled over the possibility that the two currencies could be sucker-punched by dovish Central Bank rhetoric.
The Pound started the day terribly, declining by around -1.4 cents against the New Zealand Dollar, -0.8 cents against the Australian Dollar, -0.7 cents against the Canadian Dollar and -0.5 cents against the Euro, as the latest UK inflation print came in below economists’ forecasts. Although the British Consumer Price Index printed at a 14-month high of 2.9% markets had expected a sturdier score of 3.0% and traders interpreted the shortfall to signal that inflation had peaked earlier than predicted in the UK.
With inflationary pressures set for a slow downward trajectory during the second half of the year investors speculated that the Bank of England would have more flexibility to increase its quantitative easing scheme. With PMI results coming in positively at multi-year highs the British economy looks to be picking up some momentum, however, the BoE’s surprising policy statement earlier this month suggested that new Governor Mark Carney is keen to drive the UK to exit velocity through enhanced monetary easing to ensure that Britain’s recessionary spiral is well and truly banished.
Any hints in this morning’s BoE Minutes report that the UK Central Bank is considering further asset purchases, or any forward guidance in the form of interest rate assurance would most likely lead to Sterling sell-offs and could see GBP/USD fall back towards significant psychological support at 1.5000.
The Pound to US Dollar exchange rate could sail into more stormy waters during the afternoon if Fed Chairman Ben Bernanke brings the prospect of QE3 tapering back to the table during his Congressional Testimony. A move of this nature would also carry serious consequences for the commodity bloc and the Euro, as risk aversion would most likely kick back into action.
The US Dollar’s recent rallies were derailed on July 10th when Bernanke struck a surprisingly dovish tone on monetary policy. Whereas his previous statement on June 19th had suggested that asset purchases would be tapered imminently, his latest comments pointed towards a prolonged period of monetary easing, killing demand for the US Dollar. The Australian Dollar, the New Zealand Dollar, the Canadian Dollar and the Euro all rallied against the US Dollar in response to the news as US Treasury’s became far less profitable for investors.
If Bernanke’s testimony this afternoon is cut from the same elk that provided the foundations for last week’s statement, and sustained asset purchases are discussed, then the US Dollar could weaken further against the commodity bloc, the Euro and the Pound. However, if the Fed Chairman decides to re-ignite the tapering debate then it is highly probable that the US Dollar will soar at the expense of the rest of the currency market.
Support for GBP/USD lies at 1.5000 and 1.4831, whilst technical resistance kicks in at 1.5250 and then 1.5500.
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