Market expects dovish minutes with a strong possibility of QE

Tom Tong16/Nov/2011Currency Updates

GBP

Sterling fell against the Dollar yesterday as investors trimmed positions on the Pound, largely due to prospective dovish BofE minutes released today. Despite posting a decrease in Inflation from last months figures, to 5%, it is widely expected and certainly the BofE viewpoint, that inflation will reduce dramatically in 2012 due to the VAT decrease and a reduction in the cost of commodities. This does, however, leave the door wide open for a further increase to the asset purchase programme which is currently being priced in against the pound.

With the progressive destabilisation in the European bond markets, bringing with it Dollar strength across a basket of currencies as portfolios trim riskier assets, coupled with the prospect of further QE, Sterling is currently under pressure against the Greenback. Conversely, until recent sessions due to possible more QE, Sterling has outperfomed the single currency as the market seems to percive it as the better of a bad bunch and somewhat of a safe haven, especially in the bond markets. If no silver bullet is found in Europe, there is a high possibility this trend could remain.

Today’s release of average earning and the claimant count from the UK will be widely watched, however, Mervyn Kings speech and the inflation report take center stage. This will hopefully give more clarity as to further expansion of asset purchasing and expectations for Sterling over the coming months.

EUR

With continuous rising bond prices and markets still wary over the new technocrat governments in Italy and Greece, the Euro hit a five month low against the Dollar on Tuesday. Italian bonds are again hitting the untenable 7% area and with no sign of change, the increasing possibility of further Euro weakness becomes more apparent.

European GDP yesterday came out broadly as expected yesterday and the German ZEW report, reporting consumer and economic sentiment, outperformed expectations; Yet In a dramatic party conference speech, the German chancellor Angela Merkel stated the current situation in Europe is the worst seen since world war 2.

As the Euro saga continues to unfold and little solutions found by the G20, bearish market sentiment against the single currency continues to grow and therefore the chance of returning into recession becoming ever more realistic.

Today sees the release of inflationary figures from the European Union and is expected to post figures of 3% year on year. Any deviance in this data could see further movement in the Euro.

USD

Due to the current run on bond markets and ever more increasing chance of the European Union fragmenting, the USD has gained strength across a basket of currencies. As seen previously, investors have little choice in where to place assets in troubled times and we have also seen the Japanese Yen and gold increase in value due to the same predicament. Despite Ben Bernanke also stating that the Fed would do whatever it takes to stabilise the USA and again left possible the prospect of more QE, the market has bought the Dollar in recent times of crisis. This move looks to gain strength both technically and fundamentally and until we see more clarity in Europe there is currently no reason for a change in this attitude.

Market sentiment can change very rapidly and the situation faced presently could be completely different to that in a short timescale, yet at present and If exposed to the USD, a cautious outlook over the coming months could transpire to be more than prudent.

US data out today comes in the form of CPI, industrial production, tick flows and the housing market index. One could argue that fundmental and geopolitical influences are at the forefront of price movement lately, yet all posted figures will be scruitinised profusely as there are currently numerous issues influencing the market.

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Written by Tom Tong

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