GBP Ignores QE Threat
Sterling was the big mover in the European session. As the US walked in, GBPUSD was largely flat on the day, but intraday volatility jumped with a 1-big figure move down to 1.5660 before a complete retracement. The catalyst for the move down was a dovish set of BoE minutes from the June meeting, where Governor King voted in line with David Miles and Adam Posen for an extra £50bn of QE, while Paul Tucker wanted £25bn more. UK economics notes that the minutes are clearly signaling the prospect of further quantitative easing, and Eurozone developments over the last few weeks increase the prospect of a July injection. However, these minutes need to be viewed in the context of the Mansion House speech. The Bank is seeking to increase the money multiplier through its policy actions. Therefore, the scope of any increase in quantitative policy may be gradual. We don’t think that there is necessarily a strong case for more than GBP50 bn at this stage, as per King’s request. Norges Bank is due to meet at 12.00 GMT. Domestic macro-economic indicators such as PMI readings, industrial and manufacturing production along with consumer indicators and growing private debt burdens lead us to believe that a more hawkish stance on monetary policy will be necessary, possibly even at today’s meeting. However, the ongoing stress in the Eurozone (and its indirect impact on Norwegian bank funding costs), coupled with the persistent strength of the krone, will likely temper this shift. In the Eurozone, Bloomberg reports that Chinese President Hu Jintao will stop in Spain on his way back from the G20. This is not without precedent. A few years ago, the Vice President stopped in Spain unannounced on the way back to Beijing, and met with the Spanish Foreign Minister, who pledged help with lifiting an EU arms embargo in return for Chinese assistance. Reuters reports Greek leader Kouvelis saying his Democratic Left party will participate in the vote of confidence for the new government. PASOK’s participation and confidence will be crucial; Samaras and Venizelos are scheduled to meet on the hour. Meanwhile, market expectations continue to build that Wednesday’s FOMC meeting may produce yet another round of balance sheet expansion, boosting risk currencies like AUD and NZD to unsustainable levels. Our US economics team are sceptical and do not expect any further money creation, although they do expect the policy language to change to indicate the Fed’s greater readiness to ease in future if required, especially given the increased risks to the outlook arising from the Eurozone crisis. A temporary extension of Operation Twist cannot be excluded either. If that is all the Fed delivers, we would expect the US dollar to claw back much of the losses seen over the past 24 hours. As far as the sequencing is concerned, the policy statement is scheduled to be released first, followed by forecast revisions 90 minutes later, and rounded off by Fed Chair Bernanke’s press conference which begins 15 minutes after that.
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