Forex: Markets to Look Past BOE Minutes, Focus on FOMC Outcome

Talking Points

British Pound Unlikely to Find Lasting Volatility in BOE Minutes
All Eyes on FOMC Result, $5-10 Billion QE Reduction Expected
US Dollar’s Fate Hinges on “Taper” Outlook Beyond September

Minutes from September’s Bank of England monetary policy meeting headline the economic calendar in European trading hours. Traders will be keen to size up the voting pattern for and against an expansion of quantitative easing (QE) at the first sit-down of the rate-setting MPC committee since it introduced its forward-guidance regime in August. Data compiled by Citigroup shows UK economic news-flow notably improved relative to expectations between this and last month’s BOE meetings, policymakers were probably not under particularly strong pressure to expand stimulus. Furthermore, it seems unlikely that even the more dovish members of the MPC were prepared to introduce something new into the policy mix without wanting to see the guidance framework in play and assessing its impact for longer than a few weeks. On balance, that suggests today’s release may be a non-event for the British Pound and financial markets at large.

From here, the spotlight shifts to the much-anticipated Federal Reserve policy announcement. The outing is expected to produce the first “taper” of the QE3 stimulus program, with the latest median forecast of economists polled by Bloomberg calling for a $5-10 billion cutback in monthly asset purchases. The path forward beyond that remains highly uncertain however. That means the updated set of FOMCeconomic forecasts as well as Chairman Ben Bernanke’s press conference following the policy decision will offer ample fodder for speculation and volatility. If investors are met with Fed rhetoric that (directly or indirectly) argues in favor of a sustained QE reduction cycle into the end of the year, market-wide risk sentiment is likely to deteriorate while the US Dollar advances. A more cautious tone that fails to map out a defined trajectory for the near-term policy outlook stands to produce the opposite result.

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