Forex Trading

The British Pound may yield a muted response to the upcoming release of the minutes from the latest meeting of the Bank of England considering the markets have likely already priced in a very dovish bias after last week’s dismal quarterly inflation report. Rather, sterling may opt to fall in with risky assets yet again.

Key Overnight Developments

• Japan’s Economy Contracts at Record 15.2% Pace
• Australian Consumer Confidence Plummets

Critical Levels



Euro price action saw itself fall off horizontal resistance against the U.S. Dollar located at the 1.3662 level. Dollar pairs in general confined themselves to tight trading ranges with the British Pound moving virtually nowhere during Asia’s trading session.

Asia Session Highlights



Japan's economy in the first quarter contracted more than it did in the final three months of 2008, but still managed to perform stronger than economists had expected. The first three months of 2009 saw Japan's economy shrink 4.0%, worse than the negatively revised 3.8% contraction that the Asian country saw in the final period of the previous year. Expectations had called for the figure to actually perform weaker, that is that the economy would contract by 4.3% in this period. On an annualized basis the rate of output decline rose to a record pace of 15.2%. A Bloomberg survey showed that economists expected the annualized pace to be as optimistic as +2.0% and as bad as -19.8%.

Across the board, investments continued to dwindle. Capital investment alone fell 10.4% in this recent period as opposed to a decline of only 6.7% and 4.4% in the final two quarters of 2008. Investments in new residential home development fell 5.4% after actually rising in the final 6 months of the previous year. Overly-optimistic investments in these residential properties may bode negatively for those who participated. As a result of the contracting economy, those who tied their money into such ventures may now be seeing a residential community averse to purchases of new homes. Unless these development projects primarily resided in apartment ones, these investments could continue to bring the economy southward as lost money fails to be transferred to productive capital needs. But because Housing Loans have been steadily increasing since December, property developers may actually benefit from this contracting economy, which has brought about very low interest rates.

Australian Consumer Confidence fell in May after having risen in April for the first time since December, according to Westpac Bank. May saw consumer sentiment fall 4.3% after surging ahead 8.3% during a month in which the Australian stock market recouped its losses for 2009. April's figure comes on the back of stock selling and rising energy prices. Wages paid to Australian laborers rose in line with expectations, albeit at a slower rate than during the final three months of 2008. The move came during a time when unemployment rose, allowing employees to use the weak labor market as a bargaining tool.

Euro Session: What to Expect



German Producer Prices are expected to have contracted -1.3% in the year to April, the most in nearly 7 years. Falling wholesale inflation foreshadows continued downward pressure on consumer prices as lower manufacturing costs are passed on via cheaper finished products. The annualized inflation rate fell to the lowest level in a decade in March and although prices rebounded a bit on Easter-linked spending and currency depreciation in April, the risks surely remain to the downside as deepening recession compounds lower input costs. Indeed, the danger going forward is that continued weakness in economic growth both at home and abroad will encourage expectations of deflation, a scenario that would substantially compound the downturn by encouraging consumers and businesses to perpetually hold off on spending and investment to wait for the best possible bargain. For their part, the European Central Bank has continued to lag in offering aggressive monetary easing on par with their counterparts in the US, UK and Japan. Although ECB President Jean-Claude Trichet announced that the bank would move forward on quantitative easing with a scheme to “purchase euro-denominated covered bonds issued in the euro area,” details of the program (and thereby its actual commencement) have been delayed at least until the next policy meeting on June 4th. Such waffling may see the Euro punished as traders price in a longer path to recovery.

Minutes from the last meeting of the Bank of England are also on tap, with traders anxious to get a glimpse into the dynamics behind policymakers’ surprise decision to expand quantitative easing (QE) programs by 50 billion pounds. On balance, the impact of the release may prove to be on the muted side of things considering the markets have already had an opportunity to price in a very dovish BOE after last week’s quarterly inflation report revealed that the bank expects inflation to remain below the target 2% until 2012 as the economy takes a slow path to recovery from the current downturn. Indeed, yesterday’s weak CPI report failed to hold back the currency as risky assets advanced across financial markets. Still, selling pressure could emerge if it is perceived that the last QE boost was one in a series of expansions that will continue in the medium term.

Written by Ilya Spivak, Currency Analyst
Article Source - British Pound May Look Past Bank of England Minutes, Follow Risky Assets (Euro Open)