Market News & Insights
18 July 2013

MPC United – For Now

EUR/USD 1.3114
GBP/USD 1.5177
GBP/EUR 1.1572 (0.8642)
EUR/CHF 1.2368
GBP/CHF 1.4313
GBP/AUD 1.6562

The battle of the central bankers threw up one surprise and one rather muter affair. The BOE minutes saw sudden demand for the pound as it emerged the Mark Carney has united the MPC, and not in a way many would have expected.

Before he took office, expectations were Carney would adapt an aggressive QE style policy, we have warned for months that the pace of the UK recovery does not support such action and it would appear Carney will be taking another approach. The MPC voted 9-0 to maintain asset purchases, versus previous months voting of 6-3, Carney’s possible shift in voting was highlighted by us yesterday but the surprise came from MPC members Miles and Fisher who both changed their votes from in favour for additional asset purchases to maintaining at £375 bln.

This does not completely rule out further asset purchases as both Miles and Fisher have stated that they would like to see additional asset purchases run alongside other policy, but they are awaiting the August 7th inflation report before making further judgement. We will also have to wait until August 7th to hear more about forward guidance in relation to interest rates but this does appear to be the favoured route for the BOE.

Ben Bernanke’s update to the House on Economic policy threw up nothing new and was a rather dull affair. Bernanke appeared tired of repeating his recent rhetoric but I think he did manage to get his point across. Tapering will occur as the US reaches desired economic levels, they are not there yet, there are risks to this occurring but should the current pace continue then they will look to taper later in the year, toward the end of Q3 or early Q4.

He also highlighted that tapering was not monetary tightening, simply slowing down the pace of easing. Interest rates will remain low and policy will remain accommodative for a prolonged period of time. Risks to an early exit remain the same, inflation remaining persistently low, mortgage rates getting too high, any economic drag from fiscal policy and a slowdown in global growth.

Eurozone data has been slow the last few days with the usual political and austerity concerns highlighting the vulnerability of the peripheral, but the single currency is showing little impact of this. Data remain light today with only the Eurozone current account balance for May being released.

UK retail sales top the morning calendar with expectations for the June figure to pick up .2% following May’s bumper increase of 2.1%. The US session has Bernanke delivering his semi-annual report to the Senate once again, although we do not expect too much after yesterday’s dull affair. Weekly jobless claims will get some attention as will leading indicator data and the Philly Fed confidence survey.

EURGBP sitting in the middle of its recent range of extremes, overall we favour a move lower towards .8600 but there is plenty of interest in bidding EURGBP up to .8665 area where there should be some resistance and selling interest. GBPUSD coming off its highs post MPC minutes yesterday, highs above 1.5250 should act as resistance to moves higher but currently holding below 1.5200. Support below is at 1.5100 area. EURUSD fell short of reaching last week’s highs at 1.3200, currently trading around 1.3100 support. We also favour the downside here but with Bernanke on the wires later we remain cautious.