FOREX: Pound Outlook vs Euro, Yen Hinges on BOE Minutes

DailyFX   |  March 21 2012 4:21 EDT

The British Pound is likely to rise against the Euro and Japanese Yen if the BOE meeting minutes show fewer calls for additional QE at the March meeting.

Talking Points

• Pound to Rise Against Euro, Yen if BOE Minuets Show Dovish Camp Shrank
• Dollar May Rise Alongside Stocks as US Existing Home Sales Hit 22-Month High
• Minneapolis Fed’s Kocherlakota Says Stimulus Unwind May Come in 2012-13

Minutes from the March meeting of the Bank of England headline the economic calendar in European hours. The outcome may prove narrowly supportive for the British Pound in that the ultra-dovish voting pattern seen in February is unlikely to be repeated this time around. While it wasn’t surprising to see perennial dove Adam Posen vote for an increase in asset purchases, the addition of David Miles to calls for more stimulus was significant. This produced a 7-2 tally in favor of the status quo but planted expectations of an apparently growing pro-QE insurgency.

In March, Mr Posen may have found himself alone once more as UK economic data broadly performed at its best since May 2010 relative to expectations. If the vote count is revealed at 7-1 or even the unlikely 7-0, traders are likely to reduce bets on further QE over the near term and offer Sterling a boost, with outsized gains expected against the Euro and Japanese Yen (where monetary policy is likely to be least supportive over the coming months). The updated UK Budget is also set to be presented to Parliament. A smaller deficit is likely to reduce bond issuance expectations and lift Gilt yields, encouraging the Pound higher in the process, and vice versa.

On the sentiment front, S&P 500 stock index futures are pushing firmly higher, hinting risk appetite is likely to be well-supported heading into the opening bell on Wall Street as traders await US Existing Home Sales figures, where forecasts point to the highest reading in 22 months at 4.61 million. What this means for the US Dollar is no longer as clear-cut as it has been even recently however. Indeed, as we observed last week, supportive economic news has been able to produce gains for the S&P 500 and the greenback alike, reflecting the recent responsiveness of Fed officials to the apparently firming recovery.

Thegreenbackcorrected lower against its major counterparts in overnight trade as the benchmark currency digested recent gains. USD added 0.5 percent on average yesterday as fears of a slowdown in China and its impact on global output at large stoked safe-haven demand. Hawkish comments from Minneapolis Fed President Narayana Kocherlakota – who served on the rate-setting FOMC in 2011 before rotating out this and who thereby is surely familiar with most inner workings of current policy – likewise helped. Kocherlakota said the Fed may begin to unwind monetary stimulus as soon as this year or in 2013.

Asia Session: What Happened

Euro Session: What to Expect

Critical Levels

--- Written by Ilya Spivak, Currency Strategist for Dailyfx.com

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