BoE not Averse to More QE

QE remains the BoE’s key tool as the Governor, Mervyn King, hinted that central bank officials in the MPC are prepared to follow colleagues in the US and elsewhere and take fresh action to support the economic recovery, if the outlook fades. Although King appears to be leaning in favour of more QE, markets will be eyeing tomorrow’s GDP figures for a clearer picture regarding the BoE’s stance next month. The latest PMI figures reveal some signs of improvement in China, but manufacturing activity in the Eurozone unexpectedly contracted for October. Meanwhile, today’s US Fed meeting is expected to be a low key affair.

Pound Sterling – UK Markets

Sterling is trading flat against the US Dollar, but has slipped below the 1.60 mark as the BoE Governor, Mervyn King, strengthened hopes of a fresh round of stimulus for the UK economy. The BoE Governor left the door wide open to further QE, by stating that the central bank would indulge in further asset purchases when required. Despite elevated hopes of QE the Pound held its ground against the Euro, as Moody’s latest downgrade of Spain’s regional credit ratings hurt risk sentiment among market participants. Meanwhile, data yesterday revealed that net mortgage lending in the UK picked up for September, marking an improvement in credit conditions in Britain. Apart from the CBI trend survey due for release today, markets are expected to set their focus on tomorrow’s preliminary third quarter GDP data for clarity over whether the UK economy emerged from the double dip recession.

US Dollar – US Markets

Although the US Federal Reserve’s meeting is mooted to be a subdued affair, policymakers are expected to discuss the future course of monetary action, as Operation Twist ends in December. Reports indicate that members are expected to discuss setting numerical targets to signal how long the central bank would keep the target federal funds rate at near-zero levels. However, clarity on such matters is only expected to emerge from minutes of the meeting due for release in mid-November. The US Dollar continued to climb against the Euro, as data earlier today revealed that the Eurozone’s manufacturing PMI unexpectedly contracted for October. However, Richmond Fed’s manufacturing index cast doubts over the recovery in the US economy, as the region’s manufacturing activity unexpectedly contracted for October. Apart from the Fed’s monetary policy statement in today’s session, traders are expected to watch out for home price and new home sales data from the US.

Euro – European Markets

Uncertainty surrounding the region’s debt woes continues to plague the market. The Euro continued its slide against the US Dollar, after the latest set of PMI releases from the Eurozone revealed that the economic situation is deteriorating, with the region’s manufacturing PMI declining for October. Moreover, business sentiment index in Germany unexpectedly declined for October. Fiscal troubles in Spain appear to be growing deeper, as reports emerged that Troika officials are expected to demand tougher measures to clean up the nation’s toxic debts, dampening the chances of Spain requesting a fully fledged sovereign bail-out. With the fiscal situation remaining a cause of concern, the Bank of Spain reaffirmed that revenue shortfalls could cause the government to miss its 2012 budget-deficit target. However, news reports continued to suggest that policymakers were nearing a deal with Greece. With major releases out, the focus is expected to shift to the other side of the Atlantic to gauge the monetary policy stance adopted by the US Fed.

Other Currencies – Highlights

The Canadian Dollar is trading higher against the Euro, but remained flat against the greenback on a mixed set of cues. The Bank of Canada (BoC) maintained its benchmark interest rate at 1%, but indicated that an interest rate hike remains in the realm of possibility. However, weak PMI data from the Eurozone dampened market sentiment. On the macro front, data revealed that retail sales growth slowed for August. However, hopes of a recovery in the Chinese economy received a boost, after data from HSBC revealed that the nation’s manufacturing PMI climbed to a three month high. Meanwhile, traders are expected to focus on the BoC’s monetary policy report and Teranet/National Bank house price index for further cues on the domestic front. The outcome of the Fed’s two day meeting will also remain on traders’ radar.