Pound May Rise as BOE Officials Downplay Need for More Easing

Talking Points:

• British Pound may rise if BOE officials downplay need for stimulus expansion
• Aussie Dollar weakens, US Dollar recovering as Fed Beige Book looms ahead
• Japanese Yen soars after Sankei reports BOJ officials at an impasse on policy

The British Pound is under pressure in early European trade amid pre-positioning for much-anticipated testimony from BOE Governor Mark Carney and a group of MPC officials before Parliament’s Treasury Select Committee. Policymakers will be challenged to explain what seems to be a rosier post-Brexit referendum economy than what the central bank projected ahead of June’s fateful vote.

The outing will almost certainly prove testy as eurosceptic MPs attack Carney and company for what they see as “scaremongering” on the eve of the referendum. In turn, the central bank Governor shall have to explain that the economy does not change course overnight and defend the decision to cut the baseline lending rate and expand QE in the weeks following the Leave campaign’s triumph.

With that in mind, the markets are understandably positioning for a dovish posture as BOE officials warn that headwinds from fears of the looming UK/EU rupture will yet materialize. The government’s slow progress toward initiating Brexit may have downgraded the urgency of further accommodation however. If MPC members allude to a somewhat hands-off approach in the near term, Sterling may rise.

The Australian Dollar is likewise on the defensive after quietly drifting through domestic second-quarter GDP data as US bond yields rebound, boosting the US Dollar and putting pressure on the rates-sensitive unit. The recovery may reflect pre-positioning ahead of the upcoming release of the Fed’s Beige Book survey of regional economic conditions.

The report will form part officials’ economic assessment when the rate-setting FOMC committee convenes later this month. The markets will be keen to see if it provides some basis for policymakers’ hawkish rhetoric despite disappointing news-flow in recent weeks. Indeed, San Francisco Fed President John Williams argued that a rate hike makes sense “sooner rather than later” overnight.

The Japanese Yen soared in early Asian trade as Nikkei 225 index futures gapped down at the open of trade, seemingly stocking demand for the anti-risk currency. Progress proved absent through most of the session but a meaningful retracement likewise failed to materialize.

The news-wires attributed the move to a Sankei report claiming Bank of Japan officials are struggling to reach common ground ahead of a comprehensive policy review due later this month. Governor Kuroda and company are reportedly split between those favoring negative rates, those advocating larger asset purchases and those opposed to further easing.

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--- Written by Ilya Spivak, Currency Strategist for DailyFX.com

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