Talking Points

  • British Pound: BoE King Talks Down Risk For Inflation
  • Euro: EU Raises Growth, Inflation Forecast
  • Canadian Dollar:Bank of Canada To Keep Rate On Hold
  • U.S. Dollar: ISM Manufacturing, Fed Chairman Bernanke Testimony on Tap

The British Pound fell back from a fresh yearly high of 1.6327 as the economic docket reinforced a mixed outlook for future growth, and the sterling may pare the advance from earlier this week as U.K. policy makers maintain a cautious tone for the region. Mortgage approvals in Britain increased 45.7K in January amid forecasts for a 42.9K rise, while consumer credit unexpectedly slipped GBP 0.2B during the same period after expanding a revised GBP 0.8B in the month prior. As private sector activity remains frail, the Bank of England may continue to support the real economy throughout the first-half of 2011, but there could be a growing shift within the MPC as the central bank struggles to balance the risks for the region.

BoE Governor Mervyn King talked down the risk for inflation and said that the central bank has yet to see significant evidence of a pickup of medium-term inflation expectations while testifying in front of Parliament. As the BoE expects price growth to fall back below the 2% in 2012, the central bank head pledged to carry out additional asset purchase if price growth slips below target, and went onto say that there's a lot of dissenting views on when to raise borrowing costs as the region faces a choppy recovery. The comments from Mr. King suggest that we will continue to see a two-way split within the MPC as the economic outlook remains clouded with high uncertainty, and dovish comments from the central bank head may continue to bear down on the exchange rate as investors weigh the prospects for future policy. As the central bank talks down speculation for a rate hike, the GBP/USD may continue to lose ground during the North American trade, but demands for higher yields could spark a rebound in the exchange rate as risk sentiment continues to dictate price action in the currency market.

The Euro pared the overnight advance to hold within the previous day's range, but the EUR/USD may regain its footing going into the North American trade as European policy makers raise their outlook for growth and inflation. The European Commission sees the economy expanding 1.6% this year amid an initial forecast for a 1.5% rise in the growth rate, while inflation is expected to average 2.2% in 2011 versus earlier projections for a 1.8% print. As the economic recovery in the euro-area gathers pace, the European Central Bank may see scope to reestablish its exit strategy later this year, and speculation for a rate hike should help to prop up the single-currency as the Governing Council adopts a hawkish outlook for future policy. In turn, the near-term rally in the EUR/USD may gather pace over the near-term, but the euro could face headwinds in the coming days if the EU fails to come up with a solid solution to address the sovereign debt crisis.

U.S. dollar price action was mixed on Tuesday, with the USD/JPY advancing to a fresh weekly high of 82.23, but the greenback may regain its footing during the North American trade as the economic docket is expected to reinforce an improved outlook for future growth. Manufacturing in the world's largest economy is anticipated to expand at a faster pace in February, with market participants forecasting the ISM index to increase to 61.0 from 60.8 in the previous month, but comments from U.S. policy makers could produce choppy price action in the major currencies as Fed Chairman Ben Bernanke is scheduled to deliver his semiannual testimony in front of the Senate Banking Committee at 15:00 GMT. Mr. Bernanke is likely to maintain a cautious outlook for the economy given the ongoing weakness within the private sector, and the central bank head may continue to curb speculation for a rate hike later this year as Americans cope with the depressed housing market paired with high unemployment. Nevertheless, the Bank of Canada is widely expected to hold the benchmark interest rate at 1.00% in March in order to balance the risk for growth and inflation, and the central bank may retain its wait-and-see approach throughout the first-half of the year as it aims to encourage a sustainable recovery.