Pound Continues to Benefit from Broader Risk Appetite, With BoE on Hold

The Pound is looking to put in its fifth positive day out of the last six as it continues to trend higher on the back of a clearer political picture and broader optimism. Sterling started the day on a weak note but polls showing that the Conservative party is poised to take a majority in the government raised hopes that measures needed to reduce the budget deficit will be passed. However, earlier weakness was attributed to a pull back in risk appetite, but a rebound in stocks on the back of strong earnings and manufacturing data helped the GBP/USD end the session in the black. Indeed, we see that the Dow and the pair continue to hold a strong correlation at 39% which has remained firm over the past month. The BoE continuing to pause their asset purchase program has seen U.K. interest rate expectations lose their influence over direction which has faded to 8% from 18% a month ago.

GBP/USD

BoE Interest Rate Expectations

The Bank of England has halted all comments on monetary policy from members until after the May 6th elections. This should leave interest rate expectations at their current level with OIS pricing in 45 bps of tightening over the next twelve months. The central bank continues to leave the door open for additional QE which will continue to push out the horizon for a rate hike. The release of the BoE minutes from their last meeting will be the only insight markets will get into the direction of the MPC. Meanwhile, next week’s release of U.K. CPI, employment report and retail sales will show whether the recovery is sustaining or existing slack continues to limit growth as policy makers have contended.  Discuss this and trading ideas join the GBP/USD forum.

FOMC Interest Rate Expectations

Weak initial jobless  claims and industrial production were offset by strong manufacturing in the New York and Philadelphia regions which raise hopes that he sector will continue to drive growth until the U.S. consumer comes back on line. However, the data failed to raise the outlook for a Fed rate hike with markets pricing in a 6.9% chance of tightening beginning in June versus 11.8% a month ago. Tomorrow’s consumer confidence reading could impact the outlook for yields. Optimistic Americans typically equals more spending which will fuel domestic growth and put upward pressure on inflation. Accelerating consumer prices which rose 2.3% in March from a year ago may force the FOMC’s hand. 

Risk

The equity markets continue to trend higher with the Dow comfortably above 11,000 and the S&P 500 clearing 1,200. A rise in initial jobless claims, weak industrial production failed to deter bulls as the hung their hat on strong earnings from UPS and strong manufacturing data. Google beat estimates after the close today and that could get tech stocks going tomorrow and give traders another reason to take indices higher. The Dow is up against potential trend line resistance which could slow momentum but may not be enough to spark a reversal.      Discuss this and other fundamental data in the Economics Forum. 

To discuss this report or be added to the email list contact John Rivera, Currency Analyst: jrivera@fxcm.com

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