Major Overnight Headlines
• BoE MPC unanimous in keeping policy on hold in Sept., says spare capacity may be starting to “fade”
• BoE minutes indicate GBP fluctuations likely to be useful to MPC in managing CPI risks over time
• Fitch: leverage continues to “rise rapidly” in China’s economy; credit growth still outpacing GDP growth
• Draghi says ECB intends to move to “simpler collateral framework” as fragmentation eases, Thomson Reuters
The GBP and the UK curve were where the bulk of the attention was focused this morning in London, following on from the release of the BoE’s September MPC meeting minutes. Even with some retail or corporate GBP offers taken into account, there is really no reason why GBP/USD shouldn’t be able to test the 1.6000 level before the FOMC. Given our forward outlook, we’re already starting to think about viable entry points for a short cable position over the balance of 2013, but the near-term price dynamic in the pair (not to mention the potential ranges to open a short GBP/USD position) will obviously be heavily shaped by the Fed tonight. We still see GBP/USD ending the year lower than the 1.5800-1.6250 range.
One important spotlight within the MPC minutes was the mention of the level of sterling in the context of the 18-24 month window which is relevant to the BoE’s CPI forecast knock-out (below). The net takeaway here is that the GBP is probably becoming more important for the Committee as one key policy input. If this is so, it suggests that the mentality at the Bank has shifted tremendously away from Mervyn King’s style of “benign neglect”.
“The 4% increase in the sterling price of oil would be likely to raise the near-term profile for inflation; while the appreciation of sterling, if sustained, would bear down on inflation further out, including in the 18-24 months ahead range pertinent for the forward guidance knockout.”
Read the full report: FX Daily
BMO