Higher stocks in Asia and Europe are consistent with a bias towards risk today and a softer JPY across the board. Cable has been hovering around the GBP/USD1.700 level this morning ahead of the BoE's policy decision at 11:00 GMT. There is no expectation of a change in interest rates but there is still uncertainty as to what the Bank will decide over QE. The ECB will also announce its policy decision at 11:45 GMT.
The most likely scenario is that the ECB will leave policy unchanged and maintain its commitment to generous liquidity provision.
However, a negative inflation rate in the Eurozone and a strong EUR suggest there is a chance the ECB could step up its policy measures.
Good UK PMIs, an upturn in official production data and rises in house price surveys over recent sessions have sapped the potential for more aggressive policy measures from the BoE this month. However, there is still a significant minority expecting the BoE to at least extend its QE plan by an additional 25 bln which would take it to the limit currently approved by government. A decision to put QE on hold awaiting further economic data would be seen to be sterling positive. However, it could be argued that sterling's recent rally has pre-empted any post policy meeting rally. Also a decision not to extend QE could be softened by more detail on last week's news that the Bank will be buying corporate debt or by a reassurance that the QE door is not yet firmly closed. Whatever the initial reactions of sterling to today's events, recent data has put the possibility of UK growth by year end firmly on the agenda. In turn this has strengthened the medium-term potential for sterling vs the USD and vs the EUR. Sterling is thus likely to find decent support into any pullbacks.
The IMF's recent claim that the EUR is overvalued puts the economic performance of the Eurozone under the spotlight. By year end the Eurozone may find itself one of the few economic regions still contracting. Not only this, but in most of the world the risk of deflation has been largely discarded. No so in the Eurozone where inflation is now -0.6% y/y. To date the ECB has professed that the soft inflation data is in line with its projections. Any step up in concerns about soft inflation data could increase the dovish potential of the ECB this year and undermine the EUR. Thus, while today's policy meeting is widely expected to pass without event, the present economic difficulties should ensure that Trichet's comments are closely watched.
The AUD was underpinned overnight by a much stronger than expected headline employment data. Despite expectations for a fall, employment rose by 32.2K in July. The caveat, however, was that all the improvement came from part time jobs which are more unstable than full time jobs. This factor was highlighted by PM Rudd and saw the AUD giving back its gains, though buyers again emerged. Comments by Australian deputy PM Gillard reiterated the view that Australia is not yet out of the woods. However, it is better positioned than most other G10 economies. AUD/NZD probed higher as the NZ unemployment rate hit a nine year high at 6.0%.
US initial claims data provide a focus for the afternoon ahead of tomorrow's key payrolls data. Canadian Jun buildings permits data are due.
