Currency markets are likely to look past minutes from June’s BOE meeting to focus on the outcome of today’s FOMC monetary policy announcement.

Talking Points

British Pound Unlikely to Find Major Spark in BOE Meeting Minutes
US Dollar May Rise vs. Yen, Decline Elsewhere on FOMC Outcome

Minutes from June’s Bank of England policy meeting headline an otherwise quiet economic calendar in European hours. Traders will be watching the voting pattern on the rate-setting MPC committee to see if the 6-3 tally against an expansion of asset purchases was maintained. The tone of UK economic news flow between the May and June meetings doesn’t suggest a significant shift of the hawk/dove balance took place, pointing to a status-quo outcome that is unlikely to produce much in terms of volatility for the British Pound.

Looking ahead, the central issue for the financial markets is the Federal Reserve monetary policy announcement. The steering FOMC committee will offer the markets an updated set of economic projections and Chairman Ben Bernanke will hold a press conference. Traders are looking to the outing as a defining moment when the central bank unveils critical guidance on the timing of a reduction in QE3 asset purchases and the strategy to be used to execute it.

The Fed has surely taken note of the uneasy mood around financial markets associated with a relatively near-term reduction in stimulus. In fact, the gamut of central bank officials have floated the idea of tapering QE in commentary over recent weeks, suggesting the Fed may have been deliberately stress-testing investors to see how they might react to such a development.

With that in mind, today’s outing may be used as an opportunity to assuage fears of a rush to remove policy support. Central themes could include the acute data-dependence of the current policy framework, whereby the size of QE can be adjusted in either direction given the still-fragile labor market as well as a recent slide in priced-in inflation expectations. Rhetoric striking a clear contrast between reducing asset purchases and tightening monetary conditions may also feature prominently.

On balance, an FOMC outing that is perceived as broadly dovish in that it pushes back against bets on a relatively near-term cutback in accommodation efforts is likely to be negative for the US Dollar against the G10 FX majors. Indeed, most of the greenback’s top pairings have been primarily driven by relative policy expectations lately. USDJPY may be a lone exception, where prices could advance in this scenario as carry trades flourish against a backdrop of improved risk appetite.

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