The Pound saw choppy trading during the overnight session that would sent it to as high as 1.6219 as it benefited from the recent bout of risk appetite.
Talking Points • Japanese Yen: BoJ May Cut 25 bps • Pound: Credit Markets Show Improvement • Euro: Will ECB Join Fed in Further Easing • US Dollar: FOMC Rate Cut On Tap Pound, Euro Choppy Ahead Of FOMC Rate Decision, Is A Coordinated Cut In Store? The Pound saw choppy trading during the overnight session that would sent it to as high as 1.6219 as it benefited from the recent bout of risk appetite. Choppy trading since reaching the daily high as brought the pair back to 1.600 before finding support. The housing market showed some signs of improving as mortgage approvals rose to 33,000 from 32,000 in September and Net lending on dwelling jumped to 2.2 billion from -0.7 billion as the government efforts to provide liquidity are beginning to lubricate credit markets. However, consumer credit borrowing dropped from 1.1 billion to 0.3 billion as Britons have curbed credit card purchases as the credit crisis has led them to retrench. The U.K. economy is clearly in a recession with third quarter growth contracting 0.5% and declining global demand and weakening consumer spending will leave few sources of growth. The BoE is expected to cut rates by 50 bps at their next policy meeting which was a reinforced by comments from Andrew Sentance yesterday that upside inflation risks have diminished. Speculation has grown that another coordinated rate cut may come with today’s FOMC meeting as the BoE and ECB are expected to ease next week. There has also been talk that the BoJ may join with a 25 bps reduction bringing their already G-10 low rate to %0.25. Forex traders would push the Euro as high as 1.2849 before finding resistance and giving back some of its gains. The over 400 pips gained yesterday was on the back of increased risk appetite and the expected rate cut by the FOMC as an empty calendar presented no Euro-Zone specific event risk. Bullish sentiment may not last long for the single currency as the ECB is expected to reduce their benchmark rate by 25 bps at their November 6th meeting, if they don’t surprise with a coordinated cut. President Trichet has all but guaranteed further easing as he has used every opportunity to express the central bank’s change in bias as price pressures continue to ease. 1.3000 may be as high as the Euro reaches before it looks to resume its downward trend and take aim at 1.2000. The upcoming FOMC rate decision at 18:15 GMT will loom over the currency markets today and may lead to continued erratic trading. Expectations are that the central bank will cut by 50 bps. However, arguments for a 25 bps reduction or none at all are gaining ground as further easing is expected to have minimal impact following the massive amounts of liquidity that has been pumped into the financial system. Fed chairman Bernanke hasn’t disappointed markets yet and most likely won’t today, especially following the stock markets historic rally yesterday. Increased risk appetite has led to the dollar giving back some of its recent gains against higher yielding currencies and if the bullish sentiment continues we may see further loses for the greenback. U.S. durable goods orders will present some event risk ahead of the rate decision as demand for long lasting goods is expected to have fallen another 1.0% after the 4.5% drop in August. The number may significantly disappoint given the drop in consumer confidence to a record low. This could add to the dollar’s weakness as we may see price action start to trade off of fundamentals as fears start to abate. Will The EUR/USD Fall to 1.2000? Join us in EURUSD Forum Related Articles: A Fed Rate Cut Supports Bullish Euro Technical Outlook U.K. Chancellor Darling Looks to Revise Fiscal Rules as the Economy Faces a Recession U.S. Dollar: Fed Rate Decision on Tap - How Will the Greenback React? US Dollar: Will Risk Aversion Fade Long Enough To Let Bearish US Data Take Its Toll? To discuss this report contact John Rivera, Currency Analyst: jrivera@fxcm.com