Talking Points

  • Euro: IMF Sees Recapitalization Plan, ECB Rate Cut On Tap
  • British Pound: BoE To Maintain Current Policy, Sideways Price Action Ahead

Euro: IMF Sees Recapitalization Plan, ECB Rate Cut On Tap

The Euro advanced to a high of 1.3373 as the International Monetary Fund's European department Director, Antonio Borges, talked up speculation for a European bank recapitalization plan, but the looming European Central Bank interest rate decision continues to cast a bearish outlook for the single-currency as market participants expect to see a rate cut. Mr. Borges said the euro-area needs EUR 100-200B to shore up the banking sector, and went onto say that 'more should be done on a cross-border basis' as European policy makers struggle to restore investor confidence.

Meanwhile, the IMF argued that the ECB 'should lower its policy rate if downside risks to growth and inflation persist,' and warned that the Governing Council 'might need to reinstate some of its longer-term liquidity provision operations if stresses on interbank markets intensify further' in its biannual economic report for Europe. According to Credit Suisse overnight index swaps, market participants are still pricing a 100% chance for a 25bp rate cut tomorrow, and we may see the ECB show an increased willingness to expand its nonstandard measures as the ongoing turmoil within the financial system drags on the economic recovery. In turn, we expect the EUR/USD to consolidate over the next 24-hours of trading, but the exchange rate may threaten the rebound from the beginning of the year (1.2873) as the fundamental outlook for the euro-area deteriorates.

British Pound: BoE To Maintain Current Policy, Sideways Price Action Ahead

The British Pound pared the overnight advance to 1.5491 and the sterling may continue to consolidate over the near-term as market participants weigh the outlook for monetary policy. The Bank of England is widely expected to keep the benchmark interest rate at 0.50% while maintaining its asset purchase target at GBP 200B, but we should see the BoE refrain from releasing a statement as the central bank preserves its current policy. Indeed, the downward revision in 2Q GDP spurred speculation that the MPC will expand monetary policy further to mitigate the risk of a double-dip recession, and the committee may carry its easing cycle into the following year as the central bank continues to see a risk of undershooting the 2% target for inflation. As the BoE is scheduled to release the policy meeting minutes on October 19, the GBP/USD should trend sideways over the near-term, but the sterling is likely to face additional headwinds over the remainder of the year as the slowing recovery in the U.K. dampens the outlook for future growth.