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The British Pound is in European trading hours as currency markets turn their attention to the interest rate decision from the Bank of England. An actual change in borrowing costs is unlikely, with traders paying keen interest to anything that hints at the future course of the bank's quantitative easing program.

Key Overnight Developments

• Japanese Corporate Goods Prices Disappoint, Signal Continued Deflation
• Australian Jobs Report Disappoints, Weighs on RBA Rate Hike Expectations


Critical Levels

09-10-09

The Euro moved slightly higher in overnight trading, adding 0.1% against the US Dollar. The British Pound followed suit, testing as high as 1.6563 against the greenback.

Asia Session Highlights

Japan's Domestic Corporate Goods Price Index printed flat in August, showing producer prices continued to shrink at a record annualized rate of -8.5%. Economists had expected prices to grow 0.2% from the previous month to bring the year-on-year figure up to -8.4%. Prices of imported goods led the way lower, down -34.6% from a year before, with raw materials (particularly petroleum and coal) registering the largest losses at -0.8% on the month and -44.1% in annual terms. The outcome foreshadows continued downward pressure on consumer prices, which shrank for the sixth consecutive month in July, hinting that deflation is set to become entrenched once again in the world's second-largest economy. This is a dire prospect: if consumers and businesses expect prices to be lower in the future, they will perpetually delay spending and investment waiting for the best possible bargain, bringing economic growth to a virtual standstill. At this point, a rebound in exports seems like the only saving grace for the economy, which looks like a distant prospect for the moment considering recent Current Account data but may be helped if the policies of the incoming DPJ government result in a weaker Japanese Yen.

Australia's labor market data proved disappointing: although the Unemployment Rate remained unchanged at 5.8%, the economy shed 27,100 jobs in August, much more than economists expected. Worse still, the drop was driven by a -30.8k decline in full-time positions, marking the fourth consecutive month of large double-digit losses. More of the same is likely going forward: a survey of economists conducted by Bloomberg forecasts the jobless rate will rise to average 6.25% this year and 7.9% in 2010. Job losses will weigh on incomes and trim consumption, threatening Australia's nascent economic rebound. Data released just yesterday revealed that retail sales unexpectedly fell in July as the impact of the government's A$20 in cash handouts began to fade while higher borrowing costs undermined lending. Indeed, the past two days have amounted to a profound wake-up call for financial markets: traders that had been pricing in a 45% chance that the RBA will raise interest rates by 25 basis points in October just three days ago now see just a 16% chance of such an outcome.

Related Article: RBNZ Rate Decision Provokes Volatility but Falters with Direction


Euro Session: What to Expect

Currency markets will be focused on the interest rate decision from the Bank of England in European trading hours, with Mervyn King and company all but sure to keep benchmark borrowing costs unchanged at 0.5%. The release's market-moving potential hinges entirely on the statement accompanying the announcement, with traders paying keen interest to anything that hints at the future course of the bank's quantitative easing program. Last month's release proved pivotal as the BOE took an unexpected turn into dovish territory, expanding their asset-buying scheme by 50 billion pounds: indexes measuring traders' 1-year BOE rate hike expectations and the average value of the British Pound against a trade-weighted basket of top currencies both topped out on the very same day. On balance, it seems unlikely that policymakers would make significant changes now, preferring to first see what happens after last month's actions have been allowed to work through the economy. However, it is important to note that the BOE had largely failed to affect lending to the real economy having spent 125 billion on quantitative easing prior to the most recent expansion. It seems unlikely that pouring another 50 billion into the program will make much of a difference, leading us to speculate that perhaps the bank's actions had been intended to establish expectations of a dovish bias, cushioning the impact of a more dramatic change to current policy.

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