With the FOMC not expected to make changes to its interest rate stance this afternoon, investors' early focus was on what the British had to say about the medium-term outlook. The pound lost ground against both the dollar to $1.6476 as growth was predicted to be slow and protracted, while it also lost ground because traders were forced back to the drawing board on the timing of interest rate increases. A crescendo in global growth fears curiously brought the dollar's recent rally to a halt with investors favoring the Japanese yen as a safe haven although what role is played by a reversal of the recent surge into carry-trades is unsure.

Just one week ago expectations for where the three month British Libor rate would be by the first quarter of 2010 stood at a 1% premium to the current cash rate of 0.8%. Having also dealt with the negative fallout from Friday's U.S. unemployment report and a subsequent dash to global growth hopes, forward rates have swooned. The current price on the March future implies a yield of 1.29% indicating that investors have pared expectations by an entire half of one percent.

The Bank of England issues its quarterly inflation bulletin, which is the market's bible for predicting the future moves of policy makers. The Bank generally predicts growth and inflation in two years time based upon doing nothing and compares that position to where it would be if it took the markets' implied path. Even if the Bank followed the market's cue inflation in two years time would still be markedly below the central 2% peg. So you can see why the pound is feeling a little deflated. Analysts were lining up to predict that the bank of England would be among the first to take back the monetary reins and perhaps sooner rather than later.

The quandary for currency investors is that with June's consumer price index running at 1.8% on an annual basis, the Bank now predicts that over the coming months covered by its forecast, inflation shall dip below 1%, which would then require the writing of a public letter from the Bank to the Chancellor of the Exchequer to explain why the Bank's policy setting resulted in missing the 2% target rate. The outlook for inflation is not likely to change rapidly especially with the big rebound boost to growth over the last two quarters already behind. At the end of the day the Bank is highly unlikely to raise rates anytime soon. The sense that they might has prompted speculative buying of the pound in recent weeks.

Also today the Office of National Statistics revealed a 14-year high in the number of unemployed Britons, which rose by 220,000 workers in the quarter through June leaving 2.44 million out of work. The rate of unemployment rose to 7.8%.

The Chinese ministry of commerce noted overnight that no amount of domestic fiscal stimulus, which we're just guessing encompasses the role of bank lending, can replace the shortfall in exports. This capitulation is not what the growth bulls want to hear. Many have pointed to the Chinese economic recovery with skepticism and said it couldn't last and inferred fresh bubbles in the pipeline. Is that what we're now seeing?

In the last month investors have pushed commodity-linked currencies to near-one-year peaks on the growth rebound theory. Selling Japanese yen and finding a warming growth area especially in Asia has been the trade of the day. It would appear that the drive higher in the value of the yen at this time when a growth pause is firmly implanted in traders' minds is perhaps the result of the unwind in this trade. The yen gave up its rally mid-morning versus the dollar to ¥96.12. The euro also strengthened to ¥136.47.

According to today's Financial Times, a new debate has emerged over the direction of the dollar coming out of the recession, with many investors ceding ground to the reality that the dollar is emerging far-fitter than the euro. However, the euro has risen through $1.42 this morning possibly due to fears that the Fed might take a similar line to the Bank of England. While economists are not expecting any change in interest rates today, concern is mounting that they might expand asset purchases like the British did last week, and that they will certainly play down the need to raise rates anytime soon.

It appears that investors are suddenly playing the dollar from the short side in fear of bad economic news as though it was a negative barometer of risk aversion. Typically the dollar responds well to bad news as a barometer of fear. We think this is purely down to the fact that the market is nervous heading into this afternoon's statement. We'd predict that the recent signs of growth will take priority in a statement peppered with clear signs that we're not yet out of the woods. That's a sign likely to ultimately be dollar bullish in the near-term at least.