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BoE & Fed minutes’ forex play

by Ashraf Laidi

Sterling gets a boost after the Bank of England minutes revealed a more hawkish view on inflation, despite the vote remaining a 7-2 split majority in favour of holding rates unchanged at 0.50%. The main reason gilt yields and sterling are nudging upwards is that some members hold the view that excess capacity could fall faster on current interest rates than was communicated in last week’s BoE quarterly inflation report. But don’t bet the on the minutes of the Fed’s October meeting doing the same for the greenback.

Since the BoE quarterly inflation report is led by the dovish head of economic forecasting, Andrew Haldane, the minutes were an opportunity for the hawks (McCafferty, Weale) to vocalize the view that wage growth has increased and inflation risks remained to the upside, not to the downside as was assessed in last week’s inflation report.

Yet, these minutes are unlikely to alter market expectations that rates will be raised no earlier than next autumn.

Looking ahead, we expect sterling to retreat again later tonight as the Rochester and Strood by-election looks set to be another victory for UKIP, thereby highlighting the anti-EU risk play for the currency. But before that, a speech from BoE MPC member Nemet Shafik at 14:45 GMT today could restrain the pound’s bounce as Ms Shafik is known to lean on the dovish side of the policy spectrum.

Beware USD bulls from Fed minutes

US dollar bulls are holding their breath ahead of today’s release of the minutes from the FOMC Oct 28-29th meeting, and whether members will repeat their preoccupations over the strength of the US dollar. Last month’s release of minutes from the September meeting hit the dollar across the board as they went so far as to refer to the currency’s appreciation as a risk to growth, rather than the recent description of an inflation-dampening force.

The rise in the dollar between the September and October Fed meetings was more modest than that between the July and September meetings, but this is unlikely to prevent the Fed from re-expressing concerns over the currency, especially as the Bank of Japan took the plunge into further QE, days after the Fed’s official end of QE3.

USD/JPY, GBP/USD and gold

US 10-year bond yields are a mere three basis points higher than they were at the October 29th meeting, but the US currency has broadened its gains across the board, with the USD index well into its fifth consecutive monthly rise—the longest since 2010. More references to the USD in the Fed minutes is likely to provide USD bulls with a temporary opportunity to re-enter USD/JPY longs and GBP/USD shorts at more attractive levels, with 120 yen and $1.5380 looming large. This could also mean an extension in gold’s recent rebound towards the four-month trendline resistance of $1230.A break above $1260 is unlikely at this time.


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