Talking Points

Bank of England Rate Decision May be a Non-Event for British Pound
US Dollar Recovers Amid Rumors of a Deal to Raise the Debt Ceiling
Aussie, Kiwi, Yen Sold Having Outperformed Since US Gov’t Shutdown

A monetary policy announcement from the Bank of England headlines the economic calendar in European hours. Governor Mark Carney and company are expected to maintain the policy mix as-is, restating the forward guidance principles outlined in Augusts’ quarterly Inflation Report. The framework calls for the benchmark lending rate to remain at 0.5 percent while the stock of asset purchases is held at £375 billion whilst the unemployment rate is above 7 percent.

UK economic data has notably deteriorated relative to expectations since the last BOE meeting, but this seems unlikely to spur the central bank to expand easing efforts for the time being. Rather, it seems to reinforce Governor Carney’s assertion that the markets had been too optimistic about the state of the UK recovery toward the end of the third quarter.

Indeed, the British Pound rallied after the forward guidance was revealed to include an inflation-based “knockout” designed to trigger a re-evaluation of the bank’s accommodative posture. That seemed to suggest the markets believed the threshold would be crossed far sooner than policymakers envisioned, making its introduction a border-line hawkish development.

Within this framework, the recent soft patch in UK economic news-flow reinforces the BOE’s baseline outlook rather than offers the impetus for expanding policy support. This means the policy announcement may prove to be a non-event, with traders waiting for minutes from the sit-down (set to be published in two weeks) for a more in-depth assessment of the central bank’s thinking.

The US Dollar mounted an impressive recovery against all of its major currency counterparts overnight amid reports that warring parties in the US Congress may be inching toward a deal approving a short-term increase in the so-called “debt ceiling” to allow time for farther-reaching budget negotiations. The Japanese Yen as well as the Australian and New Zealand Dollars bore the brunt of the greenback’s recovery having outperformed since the onset of the US government shutdown last week.

An end to the standoff would reduce its near-term impact on economic growth even as minutes from September’s FOMC show the policy-setting committee would still prefer to begin “tapering” QE this year with an eye to wind up the program by mid-2014. Taken together, this can make for a very supportive environment for the US currency. With that said, an accord is far from confirmed rumor for now and negotiations may still break down, clouding the near-term outlook.

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