FOMC: Fed also in the trenches. Bank of England and Chancellor of the Exchequer working towards a support scheme for the British economy UK in case of an escalation of the euro area crisis: downside risks weighing on the pound reduced as a result, even in the event of quantitative easing...…
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Next week will in many ways be a crucial one. Its outset will be marked by the markets’ reaction to the outcome of the elections in Greece, which will be followed by the G20 summit. In the United States, the Fed will be called to take a stance at Wednesday’s FOMC meeting. At the beginning of the weekend, the Eurogroup and Ecofin will start preparing the European Council summit scheduled at the end of the month. The euro area crisis will be as topical as ever, stealing the limelight from an important round of data releases referred to June, both in Europe and in the United States.
USD (nominal effective exchange rate) – Very important data releases in the US will probably be overshadowed by the outcome of the FOMC. If a new quantitative easing phase is announced, or opened, the dollar’s impact reaction could be negative. However, this should rapidly turn into a positive response. The dollar’s decline this week should also help in this direction, together with the possible rise in risk aversion tied to next week’s events and their impact on the euro area crisis (unless the outcome of these events is positive, of course).
EUR – The euro rose throughout the week, from EUR/USD 1.24 to 1.26. The initial thrust was provided by the bailout of Spanish banks by the EFSF/ESM. No positive developments followed, however, nor was the exchange rate supported solely by the financial aid guaranteed to Spain, as this is considered far from sufficient to solve all the country’s problems. In a context of record-high short euro exposure, the movement may have been helped by short-covering flows ahead of more decisive events. The first will be the election in Greece. If the outcome is unfavourable, the euro may shed all the gains made over the past few days. Lacking encouraging developments on occasion of the G20 summit on Monday and Tuesday, downside may extend to between EUR/USD 1.2400 and the recent low of 1.2288. Subsequent events and data releases may make no difference, unless a potentially negative outcome of the election is followed by “constructive” action being taken at the European level. On the whole, the situation is extremely delicate, therefore risks are skewed to the downside (possible new lows below 1.22 and around 1.2000).
GBP – Important news from the United Kingdom: the Bank of England and the Chancellor of the Exchequer are working on a scheme to support the British economy, in the event of an escalation of the area euro crisis. King said that the chances of a new round of quantitative easing being implemented have increased. Many other initiatives are also being planned, ranging from credit easing measures, which should be operational in a matter of weeks, to the concession of multiyear funds to banks – at lower than current market rates – to spur lending to businesses and households. Implementation of the scheme should support sterling, containing its correction margin should the APF effectively be expanded on occasion of the next monetary policy meeting/s. Next week will in any case be rife with events. Data will be released on inflation, the labour market, and retail sales, and the CBI industrial sector survey will also be published. In case of disappointments, sterling would in any case stay exposed to drops to between GBP/USD 1.54 and 1.52, although downside should be smaller than for the euro – also thanks to the aforementioned scheme – with the result that the effect on the EUR/GBP cross rate could be temporarily negative (return towards/below 0.8000). Also, on Wednesday the minutes of the latest BoE meeting will be published. It will be interesting to verify whether the decision to leave the APF unchanged again this month was taken based on the previous majority of 8-1, or if a wider split has started to emerge. If so, the pound would correct, but more so (or exclusively) against the dollar.
JPY – The yen stayed put in the USD/JPY 79 area, and subsequently strengthened to USD/JPY 78, after another BoJ meeting at which no new measures were announced to weaken the exchange rate. Shirakawa said that the central banks are keeping in close touch with each other, and the BoJ may well have opted to at least await the outcome of the Greek elections before trying to guide the market’s autonomous trend. In case of excessive turbulence, the central bank would be ready to intervene. On October 31 2011, the authorities waited for the exchange rate to hit the 75 mark before acting.
Appendix
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