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Bank of England minutes could show more dovish tone ahead of FOMC

Bank of England minutes could show more dovish tone ahead of FOMC

In the wake of yesterday’s IMF downgrade of UK growth forecasts, particular attention will be focussed on the release of the latest minutes from the Bank of England September MPC meeting, where there was some speculation that the committee might have been swayed with respect to further asset purchases at this month\'s meeting.

Of particular interest will be whether any other members join Adam Posen in calling for further measures to stimulate economic growth. If more than two members join Posen in pressing for more QE, the likelihood of more QE in October will increase significantly.

A number of commentators seized on the contents of this week’s Bank of England quarterly bulletin, where Bank of England economists indicated that the last round of QE was a success. What these commentators chose to ignore was the additional comments that any further stimulus may well not have the same effects, if tried again, given the different economic environment now as opposed to then. Inflation was less of a factor in 2008 than it is now and despite Adam Posen’s insistence that inflation will fall back in the next year or so, he was also saying that two years ago and we’re all still waiting. The banks credibility on that score is becoming stretched in the extreme.

At the same time the latest public finance data is also due for August with expectations that July’s small surplus will be replaced with another deficit of £11.3bn.

Later on in the day, former hawk and chief economist Spencer Dale is due to give a speech in South Shields which could well shed further light on any discussions shown up in the earlier released minutes.

The lack of any agreement after a second teleconference call between the troika and the Greece government has seen some of yesterday’s early optimism eroded somewhat. In a statement released last night the EU stated that the troika would return to Athens next week after weekend discussions at the IMF annual meeting.

The statement by the EU that “good progress” is being made, while obviously designed to inspire confidence, doesn’t really do anything of the sort, and does suggest that significant differences remain.

If the last few days are anything to go by this continued game of political brinksmanship looks likely to continue all the way into October, when Greece will eventually need the money to avoid a default. Also today the German parliament’s budget committee holds its final, closed-door meeting on the European stability fund and the second bail-out package for Greece.

Later on in the day the Federal Reserve concludes its two day meeting to discuss further measures to stimulate the US economy with expectations high that the committee will embark on “operation twist” where the Fed sells short dated securities and buys long dated securities in an attempt to drive long term interest rates down and flatten the yield curve.

There is some hope that the Fed may do more than that, but that seems highly unlikely given the slightly more toxic political back drop, which manifested itself last night in the form of a letter from Republicans to Bernanke urging him to think carefully about the risks of further stimulus.
Even allowing for this controversial political intervention, it is likely the recent rises in core inflation, as well as the slightly more hawkish make-up of the FOMC at this time, could well limit Bernanke’s options in any case.

EURUSD – despite the Italy downgrade the single currency was unable to break below the lows this week at 1.3585. The low last week around 1.3500 remains the key obstacle to further losses in the short term. Until such time as we see a break of this 1.3500 level the single currency will remain susceptible to sharp rebounds, filling the gap from Friday’s close back towards 1.3800. 1.3900 also remains a key level given that it equates to a 38.2% retracement of the down move from 1.4550 to the 1.3500 lows.
The next target, on a break of 1.3500, remains between 1.3360 and 1.3405, with 1.3405 being 50% retracement of the entire rally off the 1.1880 lows in 2010 to the highs this year at 1.4940. 1.3050 is the 61.8% retracement of the same move.

GBPUSD – the pound has continued to struggle to rebound off this week’s 8 month low at 1.5635. To have confidence that a short term base is in we would need to see a break above 1.5780 towards 1.5870 and the 15th September highs.
It still feels like we could well get further losses towards the 1.5485 level which is the 50% retracement of the 1.4230/1.6745 up move, but we could get a sharp short squeeze first.

EURGBP – the single currency continues to trade broadly within its recent range, as it continues to trade either side of its 200 day MA at 0.8702.
This indecision keeps the possibility of a retest of last week’s highs at 0.8790 and the 55 day MA.
The bias still remains for a test back towards the lows at 0.8530, and then on towards 0.8450, but it could well take a little longer to unfold.

USDJPY – the yen continues to just about hold above the key 76.20/30 support area, despite a brief spike below in Asia this morning just about keeping the prospects of further gains intact.
As long as we can hold above the 76.20/30 area a bounce remains the preferred option on a break through the 55 day MA, just above the 77.70 level.
Continued weakness in US 10 year treasury yields is constraining the upside in the yen here. Any move below the key lows at 76.20/30 could well see further US dollar losses towards 74.50.