Talking Points

  • Japanese Yen: Remains Battered Against Major Counterparts
  • British Pound: Retail Interest Shifts Ahead of BoE Rate Decision
  • Euro: Rebound To Be Short-Lived
  • U.S. Dollar:Fed Chairman Ben Bernanke on Tap

The British Pound struggled to recoup the losses from the previous day, with the exchange rate falling back from an overnight high of 1.6100, but retail currency traders appear to be holding a bullish outlook for the sterling as the Bank of England is widely expected to retain its current policy at the rate decision on Thursday. The DailyFX Speculative Sentiment index for the GBP/USD flipped for the first time in two weeks, with retail traders now net long against the pound-dollar, and the FX market may show a positive reaction to the BoE interest rate decision scheduled for tomorrow as investors speculate the central bank to gradually normalize monetary policy later this year. As the MPC maintains a wait-and-see approach, the committee is likely to refrain from releasing a policy statement, and market participants will certainly look forward to the BoE minutes due out on February 23 as they weigh the prospects for future policy.

However, as former BoE member Tim Besley expects the central bank to curb its outlook for price growth, a downward revision in the BoE's quarterly inflation report (which is due out on February 16) could bear down in interest rate expectations, and the GBP/USD may ultimately breakout of the upward trend from January if we see the MPC talk down speculation for a rate hike later this year. In light of the recent developments, there could be a growing split amongst the committee as Adam Posen sees scope to expand quantitative easing further, and the central bank may look to maintain its wait-and-see approach throughout the first-half of the year as policy makers struggle to meet on common ground. As the near-term rally in the GBP/USD tapers off ahead of 1.6300, the exchange rate may continue to consolidate going into the end of the week, but the pound-dollar should hold support at 1.6000 as we expect the currency market to show a bullish reaction to the BoE rate decision.

The Euro rallied to a high of 1.3661 on Tuesday as policy makers plan to take additional steps to strengthen the regions financial system, but the exchange rate may hold steady throughout the North American session as it maintains the narrow range from earlier this week. European Central Bank board member Christian Noyer said that the commercial bank stress test were conducted too quickly and failed to target all the lenders within the region while talking to lawmakers in Paris, but went onto say that the new EU stress test will avoid the mistakes made earlier as policy makers aim to restore investor confidence. However, as the group fails to deliver a solid solution to address the sovereign debt crisis, the EUR/USD may trend sideways ahead of the EU Summit in March, and we may see the single-currency face additional headwinds over the near-term as the risk for contagion intensifies.

The U.S. dollar continued to lack direction against its major counterparts, with the USD/JPY advancing to a fresh monthly high of 82.65, but the greenback could face increased volatility later today as Fed Chairman Ben Bernanke is scheduled to testify in front of the House Budget Committee at 15:00 GMT. Mr. Bernanke is likely to maintain a cautious outlook for the world's largest economy given the tepid recovery in the labor market, and the central bank head may push the government to address the swelling budget deficit as it hampers the outlook for long-term growth. However, risk trends may play a greater role in driving price action as the economic docket remains fairly light for Wednesday, and market reactions to the Fed Chairman's statement could be short-lived as the central bank looks to retain monetary support.

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To discuss this report contact David Song, Currency Analyst: dsong@fxcm.com