FOMC minutes take dovish turn as dollar sharply reverses recent gains

Tom Tong11/Jul/2013Currency Updates

GBP

The pound strengthened from a three-year low versus the dollar yesterday as analysts suggested that the recent sell-off was somewhat premature. With the minutes from this month’s Bank of England Monetary Policy Committee meeting not due to be released until next week and the IMF’s upgraded growth forecast from yesterday, sterling seemed to find some support against most of its major counterparts during Wednesday’s trading. Following the Manufacturing Production report released earlier this week which illustrated that manufacturing unexpectedly shrank in May, Wednesday was a day of relative retracement.

10-year gilt yields fell by two basis points yesterday after similar declines earlier this week. The Debt Management Office is to auction 2.5 billion pounds of gilts due to mature in January 2044 today – the last time they did this they sold 30-year bonds at an average yield of 3.293 percent.

Elsewhere – despite low growth prospects, the ratings agency Moody’s upgraded its outlook for the UK banking sector from negative to stable. This is on the back of assurances that the larger UK banks are in the process of addressing the additional capital buffer requirements imposed by the Prudential Regulation Authority.

Today is a quiet day in terms of top tier data.

USD

Yesterday evening saw the release of FOMC Minutes where half of the 19 participants wanted to halt $85bn in monthly bond purchases by the end of the year. Fed officials highlighted that they want to see improvement in employment figures before tapering QE. The monthly $85bn purchases have kept interest rates low, with the aim of encouraging more Americans to buy homes and cars, and hopefully bolster economic growth.

After the release of the FOMC, Ben Bernanke called for maintaining accommodation even as the minutes of policy makers’ June meeting showed them debating whether to stop bond buying by the Fed in 2013.

The 10 Year Note Auction previously reached -10.347M and came in yesterday at -9.874M.

US companies are poised to post some of their weakest quarterly earnings reports in four years as the stronger dollar erodes gains in stock markets.

The US and China are meeting this week to find ways to balance a wider flow of investment and goods as their central banks look to prevent excessive risk-taking from derailing the world’s biggest economies. Top on the agenda will be American companies who want to see more market access in China as foreign ownership controls blunt such availability.

No data releases of note in the market today, markets will focus on Friday’s Consumer Sentiment Index.

EUR

Germany looks set to clash again with the European Union’s executive arm. Michel Barnier, the EU’s financial services chief, released information on a plan for a single resolution mechanism allowing the Commission the sole power to decide when banks need injection of funds. This would allow decisions to be made quickly and help avoid uncertainty in the market. Even though Mr Barnier has said that he has built safeguards into the 55 Billion Euro fund, Germany has warned that it might violate the basic principals and laws of the EU by undermining national control over finances. It is generally accepted that the current proposal will have to be modified in order to be enacted.

Asian central banks are expected to have smaller foreign exchange reserves in the coming year, this is negative for the Euro. The Euro has received significant support over the past decade, even during the height of the debt crisis, from the Asian central banks, with the Euro accounting for around a quarter of emerging market foreign exchange reserves. There is data from the IMF to suggest this could drop to below 20%.

The EC review on Spain’s recovery stated that there is currently no plan or need to inject further extra cash into their struggling banks. With the banks either passing the stress test for capital shortfalls, or able to cover it by private means. However this positive mood was tapered with a warning that if the unemployment situation does not improve, then the banks could find themselves needing further help.

Industrial production figures in France showed a slight contraction of 0.4%, although this is less than was feared. In addition Italy showed a tiny increase. So finally a little optimism for the two struggling industrial powers.

Important day for the Euro, with all eyes keenly focused on the ECB monthly report, with analysts awaiting this statement on the overall economic situation of the Euro-zone.

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Written by Tom Tong

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