BOE

The next Bank of England (BOE) policy decision will be announced on Thursday August 6th. At the July policy meeting, the BOE elected to keep policy on hold at 0.5% and maintain its current level of asset purchases at £125 bln. The BOE has £25 bln left of £150 bln authorized by the UK treasury for asset purchases for quantitative ease. The BOE will likely elect to hold rate policy steady and refrain from increasing quantitative ease at Thursday's policy meeting because recent UK economic data suggest that the UK economy has stabilized. Monday, the UK reported that manufacturing PMI rose to a 16 month high. Tuesday, the UK reported that construction PMI was at its best level in 16 months as well. Last week the UK reported that mortgage approvals were at the highest level in 14 months. These reports suggest that the UK economy is nearing a bottom and that prior monetary policy easing by the BOE has helped to boost the UK economy. The impact of the BOE policy meeting should be limited. A decision to hold rate policy steady and to make no change in the BOE's asset purchase program may be a mild positive for the GBP as it would signal the BOE is more confident about the UK economic outlook. The Sunday Times reported that the BOE is under pressure to expand quantitative ease. According to the Sunday Times report the British Chambers of Commerce (BCC) says it is clear that quantitative easing is not yet fully effective and the BCC urges the Bank of England to step up the pace. The BCC calls on the BOE to expand quantitative ease by £50 bln to £300 bln in additional easing. There is a small chance that the BOE will elect to use the remaining £25 bln authorized for asset purchases as insurance for the UK recovery but the BOE is unlikely to comply with the BCC request for expanding quantitative ease in light of improving UK economic data. The main argument in favor of the BOE expanding quantitative ease is below target UK inflation. UK July PPI will be released on Friday, August 7th. PPI is expected to post a modest rise of just 0.2%.

ECB

The next European Central Bank (ECB) meeting will be held on Thursday August 6th. At May policy meeting the ECB reduced interest rates to a record low 1%, expanded its repo auctions from six months to 12 months and announced a plan to buy €60 bln in covered bonds. In June the ECB injected a record €442.2 bln in one year loans to boost liquidity and encourage lending. The ECB also signaled that rate policy was on hold and will likely remain on hold for some time to come. EU PPI declined at record pace in July as energy prices dropped and the EU unemployment rate hit its highest level in 10 years. EU inflation is in negative territory but the ECB is not concerned about the inflation outlook. ECB officials expect inflation to remain in negative territory temporarily and turn positive in 2010 as the global economy recovers and energy prices rebound. The recent recovery in global equity markets, rising commodity prices and EU economic data which shows consumer confidence improving and manufacturing PMI is at its highest level in 14 months will encourage the ECB to maintain steady rate policy and refrain from expanding its covered bond purchases. The trade will focus on the ECB press conference following the meeting. The ECB is expected to be upbeat about the economic EU economic outlook and signal that interest rates will remain unchanged at least into year-end. The trade will begin to look for clues to the timing of an eventual ECB rate hike. When EU economic data confirms sustainable recovery in the EU, the ECB is expected to quickly raise interest rates. No ECB rate hike is expected before Q1 2010. The impact of the ECB policy meeting should be limited, but the EUR could find additional support if he ECB signals that it is no longer leaving the door open for future rate cuts. A steady ECB policy decision is already discounted by current EUR are price action and Thursday's policy meeting could be a non event.