Bank of England Minutes Could Save the British Pound (page 1 of 2)

DailyFX Fundamentals 02-19-08

By Kathy Lien, Chief Strategist of DailyFX.com

What are the Best and Worst Performing Currencies Against the US Dollar?

With President's Day now behind us, volatility has returned to the currency and stock market. Having been up over 100 points intraday, the Dow Jones Industrial Average ended the day down 10 points. Long gone are the days of universal dollar strength or weakness. The US dollar sold off against most of the major currencies except for the British pound and Canadian dollars. The best performing currency today was the Australian dollar and Swiss Franc which benefitted from the $22 dollar jump in gold prices and signs that Australian interest rates will head higher. The Canadian dollar and the British pound on the other hand were the worst performing currencies against the dollar because next to the US, the most aggressive easing is expected to come from the UK and Canada. We only see cohesive price action when central banks around the world employ the same monetary policy of raising or lowering interest rates. Unfortunately when we have the Reserve Bank of Australia raising interest rates and the Bank of Canada lowering them, trading currencies has become much more complicated than being pro dollar or anti dollar. Tomorrow we have consumer prices due for release. Food and energy prices have been on a tear and for those reasons we expect consumer prices to rise as well. If CPI surprises to the upside, the best trades to take may be long USDCAD and short the GBPUSD. If CPI disappoints, expect the Australian dollar to continue to be one the currency market's best performers. The NAHB housing market index rebounded in the month of February due to an increase in buyer traffic. We do not that think the rise in the homebuilder's survey will be repeated in building permits and housing starts. With interest rates and house prices declining, bottom fishers are slowly beginning to sniff out the inventory, but just because they are sniffing does not mean that they are buying.

Bank of England Minutes Could Save the British Pound

There has been no data released from the UK today and as we expected, the Northern Rock story continued to weigh on the British pound. Nationalization is never good news for a developed country and the credibility of the UK government which has already been dealt a serious blow will come under more fire in the coming weeks. In the meantime, there could be a potential for a British pound recovery over the next 24 hours. The Bank of England will be releasing the minutes from their latest monetary policy meeting, along with money supply figures and the CBI Industrial Trends Survey. Although the Bank of England cut interest rates by 25bp earlier this month, the accompanying statement and Quarterly Inflation Report released last week was not extremely dovish. Even though BoE Governor King recognized the downside risks to growth in the Quarterly report, he raised the bank's inflation forecast and warned that near term inflation will continue to breach their 2 percent goal while running the risk of breaching the government's 3 percent limit. If inflation rises beyond 3 percent, King would be obligated to write a letter of explanation to Alistair Darling, the Chancellor of the Exchequer. With this even being a remote possibility, it will be difficult for King to justify another rate cut.

Reserve Bank of Australia Considered a 50bp Rate Hike?!

According to the minutes released by the Reserve Bank of Australia last night, the central bank actually considered raising interest rates by 50bp earlier this month.