European Session: Fed Rhetoric Continues To Stir Up Markets

Market Brief

Gold has once again outshone other assets classes by powering to new highs above $1153, bringing the gains month-to-date to an astounding +10.2%. The move has been paralleled by rallies in most major and EM currencies against the USD (albeit to a less impressive extent), however underlining the disintegration of recent correlations, equity markets put in a rather mediocre performance on the whole.

Yesterday’s major news event was the publication of the Bank of England Minutes; revealing the recent decision to expand QE by GBP25bn was in fact determined by a 3-way split vote. Seven members were united in agreeing to the headline 25bn figure, but MPC member Dale voted for no further expansion to the existing 175bn asset purchase target, whilst David Miles wanted a larger increase of 40bn to bring the total to 215bn. While the latter figure may seem peculiar, it seems MPC member Miles was trying to propose a figure that would ensure the rate of asset purchases would remain constant going forward; indeed one of the explanations for the sharp GBP rally following the original meeting was the calculation that 25bn signified a slower pace of purchases and possible sign of an end to the stimulus programme. GBPUSD dropped 50 pips from 1.6825 to 1.6775 on a knee-jerk reaction to the vote details, and subsequent strong demand for EURGBP throughout the day put GBPUSD under pressure, dropping to a low of 1.6686. Today we await the release of yet another important piece of UK data, with Retail Sales for October estimated to have increased 0.5% MoM after last month’s disappointing 0.0% reading. With the week’s major data events winding down, this will be the last scheduled risk event capable of pushing GBP beyond technical levels at either 1.6840 upside resistance or 1.6650 downside support.

The release of US CPI figures confirmed an uptick in inflation from its depressed levels, posting a better than expected 0.2% MoM gain that dragged the annualized figure up to -0.2%. The event had limited effect in the currency markets; as yet again, policy-maker rhetoric stole the headlines. St Louis Fed President James Bullard (non-voter) was quoted on newswires as saying the Fed may not start to raise rates until early 2012. The comments were perceived as dovish from a member who is usually considered to be a centrist with hawkish tendencies. However, confusingly he also added that the memory of the housing bubble may push the Fed to start hiking rates sooner than in past recessions. On balance, his remarks have been interpreted as mildly USD positive, but range bound price action is still stubbornly ensconced and it seems unlikely that any scheduled data event in the remainder of the week will be sufficient to break defined ranges. This afternoon’s session looks unpromising with only weekly claims data, US Leading Indicators and the Philadelphia Fed survey – but given the last three days’ most salient moves have been triggered by Fed rhetoric (Bernanke, Yellen, Bullard), we remain conscious of speeches expected later from US speakers Geithner and Fisher, ECB’s Trichet and Gonzalez-Paramo, and Canada’s Carney.