Risk Appetite Remains Steady
EUR remains resilient, with EURUSD trading above 1.24 on the back of buying from real money investors. Risk sentiment held up well despite weak economic data in Germany – where factory orders in June dropped by 1.7% m/m – and in Italy, which saw Q2 GDP contract by 2.5% y/y. Risk was also somewhat supported by dovish, yet familiar, comments from Boston Fed President Eric Rosengren, who called for “a much more accommodative policy”. Rosengren, a non-voting FOMC member this year, recommended an open-ended QE policy focusing on MBS. Fed Chairman Bernanke, in his prepared statement, did not discuss monetary policy. However, he noted that the US economy is still in a “fragile recovery” phase, but is “well placed” for the future. We do not expect the Fed to undertake a fully-fledged QE in September; rather we believe the Fed will opt for the discount window lending option. This is unlikely to have a material ‘debasement’ effect on the dollar. USDJPY moved higher overnight amid the improvement in broader risk appetite, heading into the BoJ’s two-day meeting. We expect the BoJ to keep its policy effectively unchanged to the disappointment of the doves. The central bank could undertake a few fine-tuning operations, which would not have a material impact on the currency. Data in Canada continued to be positive, with the Ivey PMI in July printing a strong 62.8, beating the consensus estimate of 52.0. Ahead today, BoC Governor Carney is due to speak in the UK. Also on tap will be the BoE’s quarterly Inflation Report. Given the string of weak economic data in recent weeks, we expect the central bank to revise its GDP and inflation forecasts downward. Overnight, GBP rallied on the better than expected June industrial production number (actual: -4.3%, prior: -1.6%, consensus: -5.3%), but it could come under pressure as Governor King presents a more dovish policy outlook in his press conference today. Our economists already expect a 25bp cut in the Bank Rate in November after the MPC assesses the impact of the Funding for Lending Scheme (FLS) and the current QE programme.
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