Talking Points

  • British Pound: BoE Unanimous On Rate, 8-1 On QE
  • Swiss Franc: SNB Intervention On The Table
  • Euro: Threatens Bearish Pattern, 78.6% Fib In Focus
  • U.S. Dollar: Fed's Plosser Say Policy Is 'Inappropriate'

The sharp decline in the British Pound was certainly short-lived, but the sterling may face additional headwinds over the near-term as the Bank of England shows an increased willingness to expand monetary policy further. The GBP/USD tumbled to a low of 1.6347 as the BoE board members Spencer Dale and Martin Weale scaled back their votes to increased the benchmark interest rate by 25bp, and the Monetary Policy Committee may show an increased willingness to widen the asset purchase program beyond the GBP 200B as the U.K. faces a slowing recovery.

Should board member Adam Posen gain support to increase quantitative easing by another GBP 50B, speculation for further easing is likely to instill a bearish outlook for the British Pound, but we may see the near-term rally in the GBP/USD gather pace in the days ahead as risk appetite returns to the currency market. At the same time, the ongoing turmoil within the Euro-Zone seems to have increased the appeal of the sterling as the U.K. government takes extraordinary measures to balance the budget deficit, but the recent rally in the Pound could be short-lived as the region faces a growing risk of a double-dip recession. Although we saw the GBP/USD rally to a fresh monthly high of 1.6531, the exchange rate looks as though it will trade within a broad range following the failed test of May high (1.6545), and the pound-dollar may trend sideways throughout the remainder of the year as market participants weigh the prospects for future policy.

The Swiss Franc regained its footing as the central bank refrained from pegging the low-yielding currency, but the Swiss National Bank may face increased pressures to stem the marked appreciation in the exchange rate as it bears down on the real economy. Although the SNB pledges to significantly increase the supply of the franc, we may see the swissie continue to appreciate as market participants look for an alternative to the greenback, and the SNB could be forced to intervene in the currency market as the economic outlook for the region deteriorates.

The Euro threatened the bearish pattern as the exchange rate advance to a high of 1.4506, but the near-term rally in the single-currency should taper off as growth and inflation in Europe deteriorate. Should the EUR/USD close below the 78.6% Fibonacci retracement from the 2009 high to the 2010 low around 1.4440-60, the price development would negate the chances of seeing further gains in the exchange rate, and the near-term outlook for the euro-dollar remains fairly bearish as the economic outlook for the euro-area remains clouded with high uncertainty. In turn, we should see market participants continue to scale back speculation for another rate hike, and the European Central Bank may show an increased willingness to support the real economy as policy makers struggle to contain the sovereign debt crisis.

The U.S. dollar weakened across the board and market participants may continue to diversify away from the greenback as the Federal Reserve casts a dour outlook for the world's largest economy. However, as Philadelphia Fed President Charles Plosser speaks out against the recent decision made by the FOMC and sees a need to raise the benchmark interest rate before the middle of 2013, we may see a growing split within the central bank, but Chairman Ben Bernanke may endorse the zero interest rate policy throughout the following year in an effort to encourage a sustainable recovery. In turn, demands for the USD may continue to waver, and the greenback may face additional headwinds over the coming months as the Fed keeps the door open to expand its balance sheet further.