Market Drivers 06.20.12
BoE Surprises with 5-4 vote on QE suggesting that more stimulus will come soon, cable rallies on news
German PPI shows price pressures declining markedly
Nikkei up 1.11% Europe down -0.15%
Oil at $84/bbl
Gold at $1681/oz.

Asia/Europe Eco Data:
AUD Conference Board Leading Index -1.4% vs. -0.2%
AUD Westpac Leading Index 0.5% vs. 0.5%
AUD Dwelling Starts -12.6% vs. -2.0%
JPY BoJ Publish Minutes of May22-23 Meeting no change in tone
JPY All Industry Activity Index 0.1% vs. 0.1%
NZD Current Account Balance -1.31B vs. -1.1B
EUR German PPI 2.1% vs. 2.2%
GBP BoE Minutes 5-4 against QE closer than forecast
GBP Jobless Claims Change 8.1K vs -4K
GBP Claimant Count 4.9% vs. 4.9%
GBP Unemployment Change 8.2%

North America Data on Tap
USD MBA Mortgage App 7:00
USD DOE Crude Oil, Distillate Inventory, Gasoline Inventory 10:30
USD FOCM Rate Decision 12:30
USD FOCM Release Projections of Economy and Fed Funds Rate 14:00
USD Bernanke Conference 14:15

Unexpectedly dovish BoE minutes lifted risk FX in early European trade today as markets primed themselves for more monetary stimulus from global central banks in the wake of surprisingly close vote on additional QE from Mervyn King and company. The BoE voted 5-4 to keep monetary policy steady for now with BoE governor putting himself on the side of the doves as he voted to increase the program by 50 Billion pounds.

In its minutes the bank noted, “The downside risks appeared to have grown. The near-term outlook for UK activity had softened, and output appeared to be slowing in the euro area, United States and some emerging economies. Set against that, short and longer-term market interest rates had fallen on the month and this would provide some stimulus. More significantly, however, the risks to UK and global activity from financial distress and political tension within the euro area had intensified again. The likelihood of a disorderly outcome looked to have increased, and that could, if it crystallised, have a significant effect on global demand and the stability of the banking system, including in the United Kingdom.”

Furthermore, despite remaining stationary for now, the BoE stated that,”On balance, most members judged that some further economic stimulus was either warranted immediately or would probably become warranted in order to meet the inflation target. Further stimulus might also help limit any long-lasting erosion of the economy’s potential supply capacity.” It was clear from the tone of the minutes that UK monetary authorities simply wanted to keep their powder dry ahead of the potential risks of Greek election but that they were amenable to further stimulus given the tepid rate of UK economic growth.

Cable initially dropped on the news, but very quickly recovered breaking above the 1.5700 barrier and setting fresh session highs as markets judged that currency dilutive aspects of more QE were offset by the positive prospects of such policy on risk assets in general. Indeed, post the BoE announcement risk currencies rallied with EUR/USD retaking 1.2700 handle while Aussie broke above 1.0200.

With markets clearly eager for more stimulus, the focus now turns to the FOMC meeting at 16:30 GMT and the press conference at 18:30GMT by Ben Bernanke. If Dr. Bernanke sticks to the same script that he followed in front of Congress last week -maintaining a carefully neutral position vis a vis more stimulus – the FX markets will be sorely disappointed and much of the rally in risk FX will likely be erased. If however, he hints much like the BoE did tonight, that Fed officials are open to further stimulus measures, the short squeeze in EUR/USD could quickly push the pair through 1.2800 and beyond.


  1. jassica says:

    Hi Kathy,

    I don’t really get the concept, when Fed launch QE/operation twist, it weaken the dollar as the supply of dollar is increased. Then why the QE from BOE will cause Pound to go up, both of the CB are printing money. Would you mind sharing your view of GBPUSD in short/medium term


    • Boris Schlossberg says:

      The reason why pound rallied despite QE was because the market judged it to be more positive for risk offsetting the devaluation prospect

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