Forex: Bank of England shows a three-way split log falling US dollar against all major currenices

By Michael Wright, Currency Analyst Wed Oct 20 12:00:00 GMT 2010 Talking Points

Japanese Yen: Maintains Descending Channel Pound: Bank of England Minutes Reveals a Three Way Split Euro: GermanProducer Prices Tops Expectations in September U.S. Dollar: Fed’s Beige Book, Economic Speeches on Tap The British Pound halted its three day decline against the U.S. dollar as price action reversed course at the 50-day moving average. During the overnight trade, the Bank of England minutes were released, and for the first time in almost a year, the minutes showed a three way split. As expected, policy maker Andrew Sentance pushed for a rate hike of twenty five basis points for the fifth consecutive month as consumer prices remain at their elevated levels. On the other hand, Adam Posen voted to increase the asset purchase target another 50 billion pounds. Taking a closer look at the meeting of the minutes, policy makers said that inflation risks in “either direction remain great,” and went onto add that they see a weaker recovery in the second half of the year compared to the first half. At the same time, some members thought that the need for more stimulus had increased. With uncertainty in U.K.’s economic prospects gaining pace the spit amongst committee members will likely widen in the upcoming months.

In the currency markets, the GBPUSD dropped after the minutes were released but quickly erased those losses as the greenback remains under pressure after rallying across the board yesterday on the back of China’s decision to hike rates, thus leading the buck to benefit from risk aversion. However, today’s tumble in the dollar may simply be a slight consolidation before the greenback resumes its northern journey. It is worth noting that after working its way into a descending channel for a month, the dollar index broke out of this range yesterday and now looks poised to push higher.

Meanwhile, the EURUSD halted its three day decline, and now looks poised to test 1.3865. Despite today’s advance downside risks remain as the pair managed to break and close below the 10-day moving average yesterday, while the MACD crossed over to the downside during the same period. Looking ahead, the pair may shift towards 1.3500, but we could see increased volatility during its voyage towards that level as a slew of third quarter earnings are expected to be released before, during, and after the bell today, which could further fuel risk appetite. The economic docket for the Euro-zone was fairly muted as EUR traders were faced only with the German producer prices for the month of September. Figures topped expectations, rising 0.3 percent after holding flat the month prior, while the annualized rate climbed 3.9 percent. This is of particular importance in that an advance in producer prices may be passed onto the consumer, thus serving as a leading indicator to inflation. On the newswire overnight, European Central Bank executive board member Juergen Stark said that budgetary forecasts need to be improved, while EU’s Rehn said that pre-crisis global imbalances are reemerging. Going forward, I expect the ECB to hold interest rates until at least the second quarter of 2011 as uncertainty remain, while growth in the bloc is expected to weaken in the near term.

The greenback dropped against all its counterparts during the overnight trade, with the Australian dollar leading the advance amongst the majors, climbing some 0.88 percent. The economic docket in the world’s largest economy is fairly light today but should not be overlooked. Fed officials Charles Plosser and Jeffrey Lacker will speak about regulation and the economic outlook respectively and these speeches should be closely monitored, with focus towards any indication of quantitative easing. At the same time, the Fed’s Beige Book economic report will be released at 18:00 GMT, and is expected to show that the recovery is no longer losing momentum at a rapid pace.

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Written by Michael Wright, Currency Analyst

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Michael Wright is the author of FX Headlines, Fundamentals vs. Technical’s, Intraday Trading, Weekly Spotlight, and Forex Trading Weekly Forecast

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Wed Oct 20 12:00:00 GMT 2010

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