Talking Points

  •  Japanese Yen: Upside Risks Remain Against the U.S. Dollar
  •  British Pound: Bank of England Votes 6-3 For No Change in Policy
  •  Euro: Reaches the Highest Level Since November 22nd
  •  U.S. Dollar:Fed Minutes for January on Tap

The British pound pared yesterday's losses against the greenback and reach an overnight high of 1.5890 as the Bank of England minutes showed that policy makers voted 6 -3 to keep interest rates and the asset purchase target at 0.50 percent and 200 billion pounds respectively. As expected, Andrew Sentance called for a rate hike of twenty five basis points as inflation continues to remain at elevated levels and are expected to push higher due to the increase in the value added tax measures. At the same time, Adam Posen voted to raise the asset purchase program by 50 billion pounds as growth is predicted to come back under pressure due to the region's most violent spending cuts sine the Second World War. Surprisingly, Martin Weale joined Mr. Sentance and pushed for a rate hike. The shift by Mr. Weale helped to reverse the downward pressure on the GBPUSD following yesterday's selloff as U.K. economic activity disappointed in the fourth quarter.

Taking a closer look at the Bank of England minutes, most members said that the balance of consumer prices moved to the upside, while adding that a rate increase might be misinterpreted and could hurt gross domestic product and the regions confidence. Not to overlook, policy makers said that wage growth remained moderate, while noting that inflation risks are from commodity prices. Going forward, I expect the rally in the British pound to be short lived as growth concerns will likely outweigh inflation fears in the upcoming months as the rise in price pressures are expected to be temporary. Thus, the central bank may remain refrain from tightening throughout 2011 as the upward pressure on consumer prices are said to be temporary factors. Taking a closer look at price action, the GBPUSD has halted its two day decline, but the advance is likely to be short-lived as the pair is capped by the 10-day moving average, while MACD looks poised to cross over back to the downside. Meanwhile, the weekly charts look to be carving out what may turn out to be a head and shoulders formation, with the neckline coming in around 1.5344 area. The Euro extended yesterdays advance to trade at its highest level since November 22nd during the overnight session, with no real driver behind the move other than the better than expected German import price index for the month of December. Though the euro is marginally higher against the buck, it is worth noting that the yield on Portuguese and Spanish 10 year notes are up 10 and 7 basis points respectively. As concerns stay in the spotlight traders should not overlook the developments from the bloc and any comments from credit rating agencies. With that being said, during the European trade, Fitch said that doubts remain on potential asset quality problems, and added that Spain's September deadline on banks is a long timeframe. Additional comments following through the news wire included German Chancellor Angela Merkel and European Commission President Jose Barroso who both said that there is a need for a comprehensive package to deal with the debt crisis. Looking ahead, Ital plans to auction approximately 2.5 billion Euros in bonds today. With regards to price action, the EURUSD continues to outperform as the pair remains supported by its rising trend line dating back to January 11.

The U.S. dollar pushed lower against most major currencies on Wednesday ahead of the Federal Open Market Committee meeting, which will released at 14:00 GMT. The Fed will is expected to state the recovery is picking up, but also announce that the pace of the revival is off track in order to bring down the high unemployment rate that stands at 9.4 percent. U.S. new home sales are also on tap and will be released at 15:00 GMT. Economists' are forecasting new home sales to rise 3.5 percent. A dismal release may add further weight onto the dollar, while a better than predicted report could elevate some selling pressure from the buck.

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