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Euro Holds Out Hope For Deal, Pound Shrugs Off BoE Minutes

Last updated 10/19/2011 5:45 AM ET (GMT -5) 0 Comments - Add your comment

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Boris Schlossberg

Director of Currency Research, GFT

Top Stories

• Euro Seesaws around 1.3800 as market tries to get clarity on EFSF
• BOE votes 9-0 to expand QE
• Nikkei up 0.35% Europe up 0.68%
• Oil at $88/bbl
• Gold at %$1647/oz.

Overnight Eco

• JPY All Industry Activity Index (MoM) (AUG) -0.5% vs. -0.2%

Event Risk on Tap

• USD Consumer Price Index (YoY) (SEP) expected at 3.8%
• USD Consumer Price Index Ex Food & Energy (YoY) (SEP) expected at 2.1%
• USD Consumer Price Index (MoM) (SEP) expected at 0.4%
• USD Consumer Price Index Ex Food & Energy (MoM) (SEP) expected at 0.2%
• USD Housing Starts (SEP) expected at 0.590M
• USD Building Permits (SEP) expected at 0.62M
• CAD Leading Indicators (MoM) (SEP) expected at 0.3%

Price Action

• USD/JPY slightly up to 76.80
• AUD/USD capped at 1.0300
• GBP/USD lower to 1.5725 after BOE minutes nut rebounds to 1.5800
• EUR/USD holds 1.3800 as market awaits EFSF news

Currency markets remained in a state of suspended animation as EUR/USD seesawed around the 1.3800 level and traders attempted to get more clarity on the evolving EFSF deal ahead of the EU summit this weekend. Yesterday at the close of North American trade the Guardian reported that officials were working on expanding the size of the fund to 2 trillion euros, creating a massive short covering squeeze that saw the pair rise nearly 100 point in a matter of minutes.

The report has since been denied, but  suspicion persists in the market that EU officials are working on some sort of a dramatic policy gesture that would provide a solid   foundation to backstop EU periphery debt and provide stability for the region’s turbulent credit markets. With economic calendar essentially barren during the European session, the summit continues to be the primary focus of trade in the currency market with sentiment evenly divided between skeptics and optimists as details of any deal remain unknown.

Meanwhile in UK the release of the BOE minutes revealed that the MPC voted 9-0 to expand QE to 75 Billion GBP and considered the possibility of 100 Billion GBP program as it viewed that risk were skewed to the downside.  The MPC noted that “Overall, the case for expansion was compelling.” UK monetary officials are clearly choosing to err on the side of caution when it comes to stimulus despite the fact that inflation in the UK economy remains at record high. Yet the view of the BOE is that price effects will decline rapidly next year as the impact of the increase in the VAT wears off. 

Cable initially dropped to 1.5715 on the news but the pair rallied smarty in the next several hours, boosted by improving risk appetite flows and relief that the BOE did not signal any further expansion of the QE program. Tomorrow’s UK Retail Sales  figures could prove critical to the future direction of the pair especially if they surprise to the upside creating further optimism amongst investors that a combination of loose monetary policy and improving consumer demand could provide a lift for the UK economy into the year end. The pair took out the 1.5800 handle in mid morning  London trade and could target the key 1.6000 figure if risk flows gain momentum.

In North American session today the eco calendar carries CPI and housing data neither of which is likely to have any meaningful impact on trade as focus remains squarely on Europe. Optimism is clearly growing that the EZ officials will produce a serious deal at the summit, but until details are known volatility is likely to persist with 1.3900 figure remaining the key point of resistance in the near term.  

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About The Author

Boris Schlossberg began his Wall Street trading career more than 20 years ago at Drexel Burhnam Lambert. There, he traded nearly every type of financial product on the market in the U.S., from equities and options to stock index futures and foreign exchange. His innate ability to analyze market information and use it to trade has helped him become an industry-recognized, “go to” trading professional.

These days, whenever the markets move, many organizations turn to Schlossberg for his take on the situation. He is a weekly contributor to CNBC's Squawk Box and a regular commentator for Bloomberg radio and television. His daily currency research is widely quoted by Reuters, Dow Jones and Agence France Presse newswires and appears in numerous newspapers worldwide. Schlossberg has written for publications like SFO magazine, Active Trader and Technical Analysis of Stocks and Commodities. He is also the author of Technical Analysis of the Currency Market and the co-author of Millionaire Traders: How Everyday People Are Beating Wall Street at Its Own Game with Kathy Lien. He joined GFT in 2008.