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Risk Off Ahead of FOMC, As EUR/USD Fails To Hold 1.4400

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Top Stories

  • Papandreou survives but Euro see little bounce off vote
  • BOE minutes suggest a more dovish posture
  • Nikkei up 1.79% Europe off -0.26%
  • Oil $93.84/bbl
  • Gold at $1547/oz.

Overnight Eco

  • NZD Current Account Balance (1Q) 0.10B vs. -2.47B
  • NZD Credit Card Spending 5.1% vs. 6.1%
  • CHF ZEW Survey (Expectations) (JUN)
  • EUR Euro-Zone Industrial New Orders (YoY) (APR) 0.7% vs. 1.1%
  • EUR Euro-Zone Consumer Confidence (JUN A) n/a

Event Risk on Tap

  • USD House Price Index (MoM) (APR) expected at -0.2%

Price Action

  • USD/JPY quiet near 83.20
  • AUD/USD recovers to 1.06 on risk flows
  • GBP/USD drops towards 1.6100 on dovish minutes
  • EUR/USD 1.4400 proves sticky despite Greek vote

Risk FX drifted lower in early morning European trade as the optimism over the passage of the confidence vote for the government of Greek PM Geroge Papandreou faded and the latest released of BOE minutes suggested a dovish stance from UK monetary authorities. The MPC notes from the BoE decision in June revealed that the committee voted 7-2 versus 6-3 the month prior to keep rates at 50bp.

Overall the UK policymakers saw risks moving to the downside as pace of economic activity slowed. The monetary authorities had a very difficult time discerning whether the slowdown was the result of one off effects caused by the disruptions in Japan or whether it was much more secular in nature suggesting that growth could be subpar for the foreseeable future.

Although policy makers left rates and unchanged and left no indication that they were considering any immediate expansion of the QE program, the overall tone of the minutes was decidedly more cautious suggesting that at best UK monetary policy will remain stationary for the remainder of the year. As we noted earlier, "The key sentence that sent cable tumbling was the note that, 'For some of these members, it was possible that further asset purchases might become warranted if the downside risks to medium-term inflation materialised.' This opened the possibility of QE expansion if UK growth turns negative and is likely to weigh on the pound as the day proceeds.

Meanwhile the EUR/USD failed to hold the 1.4400 level as the euphoria over the survival of the Papandreou government quickly faded. The pair had rallied strongly into the event on the assumption that Mr. Papandreou would win the confidence vote and the reaction in the FX market was a classic sell the news dynamic. The euro was not helped by weaker than expected EZ Industrial Production data which printed at 0.7% versus 1.1% confirming that manufacturing activity in the region is starting to slow. Tomorrow the market gets a glimpse of the latest PMI survey which could be crucial in setting the directional tone for the rest of the week.

Today, however, the pair may get a lift from the latest FOMC announcement and chairman Bernanke's press conference if the tone of the communiqué turns cautious. US economic activity has clearly slowed suggesting that that Fed will not curtail its accommodative activities beyond ending QE 2 this month. The key question is whether the Fed will roll over the maturing MBS on its books effectively adding liquidity to the system. If Dr. Bernanke suggests such a policy course the dollar could weaken further as the Fed policy will remain generally accommodative.

FX Upcoming

Currency GMT EST Release Expected Prior
USD 14:00 10:00 House Price Index (MoM) (APR) -0.2% -0.3%

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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