British Pound Weighed by BoE Comments, Euro Tips Lower Ahead of FOMC Minutes

The British Pound weakened during the overnight trade and slipped to a low of 1.5734 against the U.S. Dollar as the Bank of England maintained a dovish outlook for future policy.

Talking Points
• Japanese Yen: Continues to Lose Ground
• Pound: U.K. Jobless Claims Rise 23.5K in January
• Euro: Trade Surplus Widens in December
• U.S. Dollar: Housing Starts, FOMC Minutes on Tap

British Pound Weighed by BoE Comments, Euro Tips Lower Ahead of FOMC Minutes

The British Pound weakened during the overnight trade and slipped to a low of 1.5734 against the U.S. Dollar as the Bank of England maintained a dovish outlook for future policy. The BoE minutes from the policy meeting earlier this month showed the MPC voted unanimously to suspend its asset purchase program and to keep the benchmark interest rate at the record-low of 0.50%, with the central bank stating that there was "no immediate need" to expand policy further as the economy emerges from the recession.

Moreover, policy makers said that the U.K. economy is "recovering, but only weakly," and noted that the nation faces "considerable" headwinds as they expect credit conditions to remain tight "for some time." In addition, the MPC did not see any "overwhelming risk" for inflation to undershoot the 2% target, but discussed whether expanding the asset purchase program would help to bring inflation back toward the desired level faster as they expect price pressures to weaken in the second-half of the year. At the same time, a report by the Office for National Statistics showed jobless claims unexpectedly increased 23.5K in January to 1.64M, which is the highest level since April 1997, while the claimant count rate held steady at 5.0% for the fifth consecutive month. As households continue to face a weakening labor market paired with tightening credit conditions, the Bank of England is likely to maintain a dovish outlook for future policy as they continue to see a risk for a protracted recovery, and expectations for further easing is likely to weigh on the exchange rate as investors scale back speculation for a rate hike later this year.

The Euro tipped lower against the greenback after failing to cross back above the 20-Day SMA (1.3856) during the overnight session, and the single-currency is likely to maintain the broad range carried over from the previous week as the European Union continues to mull over the bailout for Greece. As policy makers aim to support the economies operating under the single-currency, the European Central Bank is widely expected to hold borrowing costs at the record-low of 1.00% next month, and the Governing Council may keep rates on hold going into the second-half of the year as price pressures remain subdued. Nevertheless, the economic docket showed constructions outputs in the Euro-Zone increased 0.5% in December after contracting a revised 0.8% in the previous month, while the trade surplus widened to 7.0B after being adjusted for seasonality from a revised 5.3B in the month prior.

U.S. Dollar price action was mixed throughout the European trade, with the USD/JPY advancing to a high of 90.65, and the reserve currency is likely to face increased volatility going into the North American session as the Federal Open Market Committee is scheduled to release its policy meeting minutes at 19:00 GMT. Ahead of the FOMC minutes, housing starts are forecasted to rise to an annualized pace of 580K in January from 557K in the previous month, while building permits are expected to fall to 620K from 653K in December. At the same time, the import price index is anticipated to climb 1.0% after holding flat during the final month of 2009, while industrial outputs are projected to increase 0.7% in January after rising 0.6% in the previous month. As growth prospects improve, we could see the greenback benefit from events scheduled for the early U.S. trade, but comments from the Fed are likely to have a greater impact on the currency market as investors weigh the outlook for future policy.
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