EUR/USD is little changed from last night's close ahead of tonight's FOMC meeting.
EUR/USD had traded higher overnight, however, with stronger stock markets reflecting a preference for risk. Sterling has received a tidy boost on this morning's publication of the minutes of the Sept MPC meeting. The minutes show that all members of the committee were in favour of steady policy. This tempered some of the concerns that had followed the publication of the August MPC minutes. These highlighted that 3 members, including Governor King, had voted for a larger increase in QE than was finally agreed. EUR/GBP temporarily dropped back below GBP0.900 on the release, cable saw highs this morning of 1.6438.
Perhaps the most interesting theme of the Sept MPC minutes is the direction of the discussion on inflation. Last week Governor King reaffirmed the view that excess capacity will bear down in inflation. However, the rhetoric of the Bank with respect to the inflation outlook has become less dovish since the spring. In the wake of 'sticky' inflation data, the Bank now view the pattern of CPI going forward as being volatile. During the Sept MPC, the reasons why inflation was not lower were discussed and it was concluded that the possibility of a fall in CPI below 1% had declined since August. This conclusion coincided with the overnight prediction of the CBI that the BoE may stop buying bonds after its current tranche of QE is complete (likely in Nov). The CBI also predicts that UK rates will stand at 2% by the end of next year which is aggressively higher than the present market median which is closer to 1.5%. Sterling is likely to remain vulnerable in the run up to the Oct MPC. However, with the market still positioned short of the pound any less dovish noises from the Bank are likely to cause a flurry of short covering.
Eurozone PMI this morning confirmed an improving economic outlook. Composite PMI rose to 50.8 consistent with an expanding economy. However, the data were not as strong as expected. In view of rising unemployment in the region and the likelihood that improvement in German exports will be moderated by slow growth elsewhere, the economic recovery in the Eurozone is likely to be slow and protracted. A stronger EUR reflects the improvement in Eurozone data registered since the spring but further strength is unlikely to be welcomed by exporters.
Stronger than expected GDP data from NZ underpinned the market's pro-risk position this morning. Q2 GDP rose +0.1% q/q allowing the NZD to build further on yesterday's gains.
This afternoon focus will be on the FOMC decision. Ahead of this mortgage applications data is due.
