MPC Split Widens

Currencies Direct January 27th 2011 - 2 minute read

Wednesday saw both the Federal
Reserve and Bank of England reveal details from recent meetings. In the Feds
case, the meeting was also yesterday, and again the Fed reassured the markets
of the continuing economic recovery. Again the Fed expressed concern over the
labour market but the key point the markets will take from an otherwise as
expected release is the continued lack of dissenters on the FOMC.  We will get the hard data supporting the Feds’
stance on Friday, when US 4th quarter GDP figures are released. Although
parts of America
also suffered a prolonged cold snap in December, we are not expecting this to
be used as an excuse for a disappointing number!

In fact, the data is forecast to
show annualised growth of around 3.5%, very healthy indeed but will need to be
maintained or even increased to help the US deal with a growing Government
budget problems (which President Obama begun to address in his SOTU address
earlier in the week). As usual in the build-up to a Fed meeting the Dollar
traded over a larger range than normal and residual volatility has carried
though to the start of the European session – so watch out! The volatility has
not been helped with this morning’s announcement by S&P, the rating agency,
that it is downgrading its rating on Japanese government debt, citing declining
prospects of Japanese economy and sparking the risk-off trade and subsequent
rise USD. Going forward, Fridays GDP figure may be a turning point for a
reversal against the Euro should the data beat expectations and we also get
strong Jobless claims and durable
goods figures this afternoon.

The Bank of England minutes,
taken with Governor Mervyn King’s speech the night before, were more
interesting because it revealed much more about the dove/hawk divide within the
MPC than the Fed release. Three members voted against the proposition of
holding rates – Andrew Sentance was joined by Martin Weale in voting for a rate
increase with Adam Posen again the most dovish, voting for an extension to the
QE program. Merv spoke on Tuesday evening, outlining the banks view that we are
in the midst of the largest squeeze on real incomes since the 1920’s, and that
inflation is likely to stay above target for most of this year. Just as we
thought things were getting better! Growing uncertainty over the UK economy is keeping Sterling in check against the Euro and Dollar
and this is unlikely to change until we find out if the last quarter was just a
blip on the continuing road to recovery or something much worse.

Report by Alistair Cotton

Written by
Currencies Direct

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