While the FOMC meeting is the focal point of the financial world, the latest Bank of England (BoE) meeting minutes could also be very telling and help determine whether GBPUSD will break 1.60.
The British pound (GBP) is holding at six-month highs against the euro (EUR) and US dollar (USD) ahead of the Federal Open Market Committee (FOMC) rate decision, and while focus may be on the Fed meeting, sterling traders must not overlook the release of the Bank of England (BoE) meeting minutes.
We are eager to see if policymakers have grown less dovish after the recent improvements in economic data. We have good reason to believe that the minutes will be slightly more optimistic because last week, BoE Governor Mark Carney, as well as monetary policy committee (MPC) members David Miles, Paul Fisher, and Ian McCafferty all acknowledged the recent economic improvements, with some even going so far as to say that the recovery has gained momentum.
Still, every MPC official also expressed hesitations that ranged from the recovery being very new to the elevated risks facing the economy. So while the central bank, on balance, has grown more optimistic, Carney made it very clear that the BoE would not change the level of quantitative easing (QE) until the unemployment rate falls to 7%, at which point the central bank could be prepared to raise interest rates.
The BoE believes the 7% level will be reached in 2016, but the market is pricing in tightening in January 2015. According to the latest CPI report, UK inflationary pressures edged lower, giving the central bank the flexibility to keep monetary policy easy, but the upcoming BoE minutes could harden or reshape those expectations, as well as affect the GBPUSD's chances of breaking 1.60.
German Investor Confidence Hits 3-Year High
The euro traded slightly higher against the US dollar on the back of a stronger investor confidence. The German ZEW survey jumped to 49.6 in the month of September, up from 42.0 in August. Despite the recent deterioration in data and political/geopolitical uncertainty, the expectations and current situations component of the ZEW survey surged and confidence reached its highest level in three years. Investors are optimistic that stronger growth in the US and China will support the German and broader Eurozone economies.
The ZEW survey was the only piece of good news for the day, however, as the current account and trade surpluses for the region narrowed in the month of July. Admittedly, most of the weak data from Europe has been for the months of July and August, and perhaps the momentum accelerated in September, and we’ll get a better sense of whether this has occurred next week when the September PMI reports are released.
Since the ZEW survey was the most important Eurozone release on the economic calendar this week, the near-term price action and outlook for EURUSD should be driven entirely by the market's appetite for the US dollar.
By Kathy Lien of BK Asset Management