Watch The BoE Vote Split
EURUSD held onto most of its gains overnight in the wake of Fed Chairman Bernanke’s first day of congressional testimony. We doubt this will last and expect to see the euro come under fresh downside pressure shortly. After all, those hoping for clear QE hints on Tuesday would have been disappointed. To be sure, Bernanke reiterated that the Fed is “prepared to take further action as appropriate” in the context of such familiar risks as the European crisis and the US “fiscal cliff”. However, he certainly did not provide anything to suggest further easing is on tap as early as August 1. Tuesday’s US data – June core CPI up 0.2% m/m; June industrial production up 0.4% m/m; July NAHB Housing Market Index up to 35 – took a back seat to Bernanke’s comments, but provided some ammunition for the growth bulls. In any event, we believe the Fed will stay in wait-and-see mode for now amid the high degree of uncertainty in the global equation. The June decision to extend the Twist programme through year end will buy time for the Fed, which would likely view the September 12-13 meeting as a better window for any potential action than August 1. After all, the September meeting will include the Summary of Economic Projections and subsequent press conference. Moreover, the upcoming Jackson Hole conference on August 31 will provide Bernanke with an opportunity to prepare the market for any decision to ease in September, by which time the Fed will have seen two additional months of employment data. Given Bernanke’s second day of testimony today is unlikely to depart materially from yesterday’s installment, our attention is focused on the Bank of England minutes from the July 5 meeting where the QE program was reactivated and an additional GBP 50 bn of Gilt purchases was announced. The voting breakdown will as usual be key, and a 9-0 outcome in favour of more QE could be taken as a sterling-negative. The sterling-negativity could be amplified if a handful of dissenters also called for a cut to the policy rate.
Click here to read the full report: UBS Morning Adviser Europe
UBS Investment Bank