Pound Soars on Hawkish Tone from BoE

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Market Drivers March 20, 2013
BoE minutes send hawkish message sending pound through 1.5150
ECB provides liquidity for Cyprus ATM, interior minister – no chance exiting EZ
Europe 0.75% Asia 2.03%
Oil $92.64/bbl
Gold $1610/oz.

Europe and Asia:
NZD CA -3.26B vs. 2.97B
CHF ZEW Survey 2.3 vs. 10
EUR German Producer Prices -0.1% vs. 0.2%
GBP UK Chancellor Osborne Presents 2013 Budget to Parliament
GBP BOE Releases Monetary Policy Committee Minutes
GBP Jobless Claims -1.5K vs. -5.2K
GBP Claimant Count Rate 7.8%
GBP Average Weekly Earnings 1.2%

North America:
USD Fed Open Market Committee Rate Decision 12:00
USD Fed Releases Summary of Economic Projections 12:00
USD Fed’s Bernanke Holds Press Conference in Washington 12:30

Cable soared off the lows in morning London trade today after a surprisingly hawkish MPC minutes pushed the pair through 1.5150 on a quick burst of short covering. EUR/USD meanwhile stabilized and rallied back through the 1.2900 figure as the saga in Cyprus continued without any clear resolution in sight.

The release of the BOE minutes took the market completely by surprise when it noted that one key reason for leaving QE unchanged was that “it could lead to an unwarranted depreciation of sterling as if it were misinterpreted as a lack of commitment to maintaining low inflation in the medium term.”

Although the UK economy remains in near recessionary conditions, the monetary authorities are clearly concerned that further QE could trigger inflationary pressures and with core CPI still above the key 2% level those concerns are justified. Thus despite the need for stimulus it is likely that the BOE may refrain from further QE actions in the near future as it continues to watch price levels and the exchange rate of the pound which has tumbled more than 10% since the start of the year.

Cable reacted quickly to the news reversing off the lows to catapult more than 100 points before pausing at the 1.5150 level. If the FOMC presser later today sends a dovish message from Chairman Bernanke then the cable rally could extend and the pair could challenge the 1.5200 level as the day proceeds.

Meanwhile in Europe the stream of news from Cyprus has provided little clarity so far, but he currency markets appear to have calmed down as traders await some sort of resolution to the banking crisis. In the meantime ECB has stated that it will provide liquidity for the ATM, but the banks remain closed and stay that way for the rest of the week. Various European officials have been on the wires assuring the markets that there is no contagion risk from Cyprus, but in order for that reality to remain a solution to this problem must found quickly. The longer the Cyprus saga is allowed to drag on the greater the loss of confidence and the risk of contagion. The EUR/USD rebounded above 1.2900 but remains capped at the 1.2950 level and its likely to be rangebound until there is more concrete news from Cyprus.

Boris Schlossberg
Managing Director

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