Currency Report 20/11 - BoE & FOMC minutes due out, FOMC minuntes will be main focus.
 

The Sterling to Euro rate continues to hover around 1.61 but GBP fell back against a stronger EUR and stronger risk positive currencies yesterday. In part this relates to a couple of soft UK data points, with the RICS house price data following on from the weaker retail sales data last week, but we still see no real reason to doubt the strength of the UK recovery at this stage. Even so, with nothing of note out of the UK today GBP seems unlikely to stray far from the neutral levels of 1.61 in GBP/USD and 1.1905 in GBP/EUR. There is probably more potential for a move in GBP/USD given tonight’s Bernanke speech, with 1.20 GBP/EUR level seemingly a bridge too far at this stage without some new evidence of EUR weakness or UK strength.

The ZEW index offers some chance of Euro volatility today, but it is hard to get excited about the potential for Eurozone growth given the weak performance in Q3, so really there seems more chance of EUR/USD movement being triggered by US news. Even though ECB officials have continued to stress the case for more easing, the downside from this risk seems quite limited for the moment, and without weaker Eurozone data the recent lows seem unlikely to be tested unless the prospect of US tapering in December is reignited.

The USD continued to trade a little soft yesterday, particularly against the more risk positive currencies, partly in response to Yellen’s testimony last week, partly in response to the fact of a rising equity market, and partly in anticipation of a dovish stance from Bernanke continuing the Yellen bias tonight. In practice we doubt that Bernanke will be too committal at this stage, and with the market essentially lined up in expectation of no tapering until March next year, a failure to rule out a December tapering may well be seen as USD positive. However, in the run up to the speech tonight the USD may slip a little further in line with the softer tone in US yields seen in the last few days.

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