Pound Surges Despite BoE Minutes Signaling More Rate Cuts Ahead

Talking Points

• Japanese Yen: Finds Resistance At 96.90
• Swiss Franc: Retail Sales Unexpectedly Rise
• Pound: Votes Unanimously to Cut Rates
• Euro: Remains Range Bound
• US Dollar: CPI and FOMC Minutes on Tap

Pound Surges Despite BoE Minutes Signaling More Rate Cuts Ahead

The Bank of England unanimously voted to lower their benchmark rate 150 bps at their November 6th meeting due to increasing downside risk to growth and deflation concerns. The pound surprisingly rose in the news after an initial dip as the vote was expected by forex traders. The Sterling has broken back above 1.500 as it continues to trade in a tight range of 1.4900-1.5100. Trendline support continues to hold and may limit losses for the pair in the near-term.

The Pound's strength is surprising since the MPC revealed in their minutes that they had considered a greater rate cut as near-term demand prospects 'deteriorated markedly'. The central bank has become concerned that the downside risk to inflation have accelerated at such a pace that their 2% target is at risk and that action is needed to prevent deflation from taking hold. Again, these fears were spelled out in the central bank's quarterly inflation report which muted its impact on today's price action. The BoE refrained from lowering rates more as they wanted to give time for their efforts to measure the impact of the prior actions and to leave themselves more scope to impact markets down the road.

The Euro saw brief weakness during the overnight session dropping over 50 bps after failing to take 1.2650 before recovering most of its losses. The single currency had traded in a tight range throughout most of the Asian session which has been typical price action over the past week. Technically the EUR/USD is forming a wedge which traditionally leads to a breakout, therefore if we see price action drop below 1.2300 we could see significant losses for the pair to follow. Conversely, a move above 1.300 would lead to more bullish momentum. The 20-day SMA has been a strong resistance level and its downward trend has continued to lead to lower daily highs, which is a strong sign that more losses may be ahead. President Trichet in an interview today called the current crisis the worst since World War II. These comments have become common rhetoric for the ECB head and a clear sign that the central bank is foreshadowing its dovish bias, which will most likely result in more easing from the MPC.

The U.S. economic calendar will present significant event risk as the minutes from the last FOMC meeting, October consumer prices and housing starts are due for release. Inflation in the U.S. is expected to have eased considerable to 4.0% from 4.9% on the back of a 60% drop in oil prices from their peak. Traditionally, the reduction in price pressures gives policy makers the scope to cut interest rates. However, inflation concerns haven't significantly factored into the Fed''s decision making during the credit crisis as growth concerns have dictated their actions. Therefore, expectations are that the central bank will cut rates by 50 bps as the downside risk to the economy continue to grow, which was underlined by the big three automakers in capital hill asking for $25 billion in assistance. Today we will get a glimpse into the MCPc's thinking as the minutes from their last meeting where they brought the overnight rate down to 1% will be released. Growing concerns over the economy combined with the troubles of the Detroit carmakers could drive risk aversion which will send the dollar higher if the risk correlation holds as it has over the past few months. Lower consumer prices may also help support the dollar as the increase purchasing power will help ease fears of a consumer spending driven recession. However, an uptick in core price could give the Fed something to think about and lower expectations of another rate cut which could lead to dollar weakness. Also, a weak housing start report could decrease expectations that the U.S. could be the first to emerge from the crisis without a bottom to housing forming which could lead the dollar lower.

DailyFX

Disclaimer

Investment in the currency exchange is highly speculative and should only be done with risk capital. Prices rise and fall and past performance is no assurance of future performance. This website is an information site only. Accordingly we make no warranties or guarantees in respect of the content. The publications herein do not take into account the investment objectives, financial situation or particular needs of any particular person. Investors should obtain individual financial advice based on their own particular circumstances before making an investment decision on the basis of the recommendations in this website. While we try to ensure that all of the information provided on this website is kept up-to-date and accurate we accept no responsibility for any use made of the information provided. All intellectual property rights are the property of Daily FX. Daily FX and its affiliates, will not be held responsible for the reliability or accuracy of the information available on this site. The content herein is provided in good faith and believed to be accurate, however, there are no explicit or implicit warranties of accuracy or timeliness made by Daily FX or its affiliates. The reader agrees not to hold Daily FX or any of its affiliates liable for decisions that are based on information from this website. Daily FX highly recommends that before making a decision, the reader collects several opinions related to the decision and verifies facts from at least several independent sources.