Pound Looks Higher as BoE Retains Current Policy- ECB in Focus

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Talking Points

  • British Pound: BoE Preserves Current Policy, 38.2% Fib in Sight
  • Euro: ECB to Keep Benchmark Interest Rate at Record-Low

British Pound: BoE Preserves Current Policy, 38.2% Fib in Sight

The British Pound climbed to a fresh monthly high of 1.5463 as the Bank of England (BoE) kept the benchmark interest rate at 0.50% while maintaining its asset purchase program at GBP 375B, and the sterling may continue to pare the decline from earlier this year as the central bank carries its wait-and-see approach into the second-half of 2013.

Although the BoE refrained from releasing a policy statement, the BoE Minutes due out on June 19 should show another 6-3 split within the Monetary Policy Committee, but we may see a growing discussion to conclude the easing cycle as the U.K. averts a triple-dip recession.

Nevertheless, there’s speculation that BoE will adopt a growth target in the coming months as Mr. Mark Carney is scheduled to take the help in July, but the MPC continue to operate under its inflation-targeting framework as the region is expected to face above-target price growth over the policy horizon. In turn, the majority of the MPC may start to discuss a tentative exit strategy in the coming months, and the committee may adopt a more hawkish tone for monetary policy as the central bank sees a sustainable recovery in Britain.

As the GBPUSD carves out a higher low coming into June, we should see the rebound from 1.5007 gather pace in the days ahead, and the pair looks poised to make another run at the 38.2% Fibonacci retracement from the 2009 low to high around 1.5680 as market participants scale back bets for more quantitative easing.

Euro: ECB to Keep Benchmark Interest Rate at Record-Low

The Euro edged higher ahead of the European Central Bank (ECB) interest rate decision, with the EURUSD tagging an overnight high of 1.3129, but we may see the single currency continue to carve out a lower top in June as the Governing Council is widely expected to further embark on its easing cycle in the second-half of the year.

Although the ECB is widely expected to keep the benchmark interest rate at 0.50%, President Mario Draghi may sound more dovish this time around, and the central bank head may increase his pledge to shore up the ailing economy as the region struggles to emerge from the recession.

Indeed, we may see a greater discussion to implement a negative interest-rate policy (NIRP) as the economic downturn threatens price stability, while Mr. Draghi may show a greater willingness to purchase Asset-Backed Securities (ABS) as commercial banks scale back on lending.

At the same time, we may see a growing rift within the Governing Council as the governments operating under the single currency become increasingly reliant on monetary support, but the central bank may have little choice but to implement additional measures in the coming months as the governments operating under the single currency become increasingly reliant on monetary support.

Should the ECB strike a highly dovish tone for monetary policy, expectations for more easing should trigger a selloff in the EURUSD, and the rate decision may serve as the fundamental catalyst to put the head-and-shoulders formation into play as currency traders weigh the outlook for monetary policy.

FX Upcoming

Currency

GMT

EDT

Release

Expected

Prior

EUR

11:45

7:45

European Central Bank Interest Rate Decision

0.50%

0.50%

EUR

11:45

7:45

European Central Bank Deposit Facility Rate

0.00%

0.00%

USD

12:00

8:00

Fed's Charles Plosser Speaks on Economy in Boston

EUR

12:30

8:30

ECB President Mario Draghi Delivers Policy Statement

USD

12:30

8:30

Initial Jobless Claims (JUN 1)

345K

354K

USD

12:30

8:30

Continuing Claims (MAY 25)

2975K

2986K

CAD

14:00

10:00

Ivey Purchasing Managers Index s.a. (MAY)

57.0

52.2

USD

16:00

12:00

Household Change in Net Worth (1Q)

$1174B

--- Written by David Song, Currency Analyst

To contact David, e-mail dsong@dailyfx.com. Follow me on Twitter at @DavidJSong

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