Forex: British Pound Eyes 1.6600 As U.K. Skirts Double-Dip Recession, What To Expect From FOMC Rate Decision

The British Pound made another run at 1.6600 as the advanced 1Q GDP report for the U.K. showed a 0.5% expansion in the growth rate, but the lack of momentum to test the yearly high (1.6598) is likely to keep the exchange rate within a narrow range during the North American trade as the Federal Reserve is scheduled to announce its interest rate decision at 16:30 GMT.

Talking Points

• British Pound: U.K. Skirts Double-Dip Recession
• Euro: Greece 2-Year Yields Hit 25%
• U.S. Dollar: FOMC Rate Decision, Bernanke Press Conference On Tap

The British Pound made another run at 1.6600 as the advanced 1Q GDP report for the U.K. showed a 0.5% expansion in the growth rate, but the lack of momentum to test the yearly high (1.6598) is likely to keep the exchange rate within a narrow range during the North American trade as the Federal Reserve is scheduled to announce its interest rate decision at 16:30 GMT. As the U.K. skirts a double-dip recession, interest rate expectations have certainly gathered pace during the overnight trade, with investors now pricing at least a 50bp rate hike over the next 12-months according to Credit Suisse overnight index swaps, and the Bank of England may face increased pressures to start normalizing monetary policy over the coming months as growth and inflation accelerate. At the same time, market participants are see a 10 percent chance for a 25bp rate hike at the next policy meeting on May 5, but the central bank may retain its wait-and-see approach throughout the first-half of the year as MPC hawk Andrew Sentance is scheduled to leave in the following month.

Before his departure, Mr. Sentance continued to call for a “gradual raising of rates” during an interview with the Manchester Evening News, and held an improved outlook for the region as the economic recovery gathers pace. As the majority of the MPC maintains a neutral stance for monetary policy, the GBP/USD may continue to face range-bound price action going into the month ahead, and we should see former resistance around 1.6400 serve as new support going forward as the exchange rate pares the decline carried over from the previous week. As the economic docket for the U.K. remains bare for the remainder of the week, currency traders may have an opportunity to take advantage of the current range between 1.6400-1.6600 in the pound-dollar, but a shift in market sentiment could bear down on the sterling as risk trends continue to dictate price action in the foreign exchange market.

The Euro fell back from a fresh yearly high of 1.4712 as fears surrounding the sovereign debt crisis sapped demands for the single-currency, and the exchange rate may continue to trend lower going into the end of the week as the European periphery face record-high financing costs. The yield tied to Greece's two-year note climbed to 25% for the first time since the single-currency was introduced in 1999, and the region may face increased pressures to restructure its debt as the government copes with unsustainable financing costs. However, the European Central Bank may continue to toughen its stance against inflation as price growth in Germany rises at the fastest pace since October 2008, and speculation for higher interest rates may continue to prop up the single-currency as it maintains the upwards trend from earlier this year. As the EUR/USD continues to retrace the decline from back in 2009, the exchange rate may make a run at 1.4800 later this week as the headline reading for European inflation is expected to increase at an annualized pace of 2.7% in April, but the heightening risk for contagion could lead the Governing Council to soften its hawkish outlook for monetary policy as the economic outlook remains clouded with high uncertainty.

U.S. dollar price action was largely mixed on Tuesday, with the USD/JPY bouncing back to a high of 82.35 after Standard and Poor's lowered its outlook for Japan to ‘negative,' but the major exchange rates may consolidate ahead of the FOMC interest rate decision as the central bank is widely expected to maintain its current policy in April. As a result, the statement from the committee is likely to spark increased volatility across the financial markets, but the central bank may merely reiterate the same rhetoric we heard back in March as it continues to carry out the additional $600B in quantitative easing. In turn, currency traders may show a greater reaction to Fed Chairman Ben Bernanke's press conference at 18:15 GMT as investors weigh the prospects for monetary policy, but the central bank head may stick with the tone seen in the policy statement as the Fed is scheduled to release its meeting minutes on May 18.

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To discuss this report contact David Song, Currency Analyst: dsong@dailyfx.com

FX Upcoming

Currency	GMT	EST	Release	Expected	Prior
USD	12:30	8:30	Durable Goods Orders (MAR)	2.2%	-0.9%
USD	12:30	8:30	Durables Ex Transportation (MAR)	1.7%	-0.6%
USD	12:30	8:30	Capital Goods Orders Non-Defense ex Aircrafts (MAR)	3.0%	-1.3%
USD	12:30	8:30	Capital Goods Shipments Non-Defense ex Aircrafts (MAR)	--	0.8%
USD	14:30	10:30	DOE U.S. Crude Oil Inventories (APR 22)	--	-2322K
USD	14:30	10:30	DOE U.S. Gasoline Inventories (APR 22)	--	-770K
USD	14:30	10:30	DOE U.S. Distillate Inventory (APR 22)	--	-2504K
EUR	16:00	12:00	French Total Jobseekers Change (MAR)	-10.0	-2.1
EUR	16:00	12:00	French Total Jobseekers (MAR)	--	2701.1
USD	16:30	12:30	Federal Open Market Committee Interest Rate Decision	0.25%	0.25%
USD	18:15	14:15	Fed Chairman Ben Bernanke Holds Press Conference	--	--

Currency	GMT	Release	Expected	Actual	Comments
JPY	23:50	Retail Trade s.a. (MoM) (MAR)	-5.4%	-7.8%	Retail spending contracts for the first time in two-months.
JPY	23:50	Retail Trade (YoY) (MAR)	-6.1%	-8.5%
JPY	23:50	Large Retailers' Sales (MAR)	-4.7%	-7.7%
JPY	1:00	Small Business Confidence (APR)	--	36.1	Lowest since May 2009.
NZD	1:00	NBNZ Business Confidence (APR)	--	14.2	Rebounds from negative territory.
NZD	1:00	NBNZ Business Activity Outlook (APR)	--	29.5
AUD	1:30	Consumer Prices Index (QoQ) (1Q)	1.2%	1.6%	The highest headline reading for inflation since 4Q 2008, spurring speculation for higher interest rates.
AUD	1:30	Consumer Prices Index (YoY) (1Q)	3.0%	3.3%
AUD	1:30	CPI RBA Trimmed Mean (QoQ) (1Q)	0.7%	0.9%
AUD	1:30	CPI RBA Trimmed Mean (YoY) (1Q)	2.1%	2.3%
AUD	1:30	CPI RBA Weighted Median (QoQ) (1Q)	0.6%	0.8%
AUD	1:30	CPI RBA Weighted Median (YoY) (1Q)	2.1%	2.2%
CNY	2:00	Industrial Profits (YTD) (YoY) (MAR)	--	32.0%	Lowest since November 2009.
EUR	6:00	German GfK Consumer Confidence Survey (MAY)	5.8	5.7%	Weakens for second month.
EUR	6:45	French Consumer Confidence Indicator (APR)	83	83	Holds steady for second month.
EUR	8:00	Italian Consumer Confidence Index s.a. (APR)	105.0	103.7	Lowest since May 2009.
GBP	8:30	Gross Domestic Product (QoQ) (1Q A)	0.5%	0.5%	Rebound in GDP spurs bets for BoE rate hike.
GBP	8:30	Gross Domestic Product (YoY) (1Q A)	1.8%	1.8%
GBP	8:30	Index of Services (MoM) (FEB)	0.2%	0.6%	Expands for the second month.
GBP	8:30	Index of Services (3Mo3M) (FEB)	-0.3%	-0.3%
GBP	8:30	BBA Loans for House Purchase (MAR)	30450	31660	Highest since July.
EUR	9:00	Euro-Zone Industrial New Orders s.a. (MoM) (FEB)	1.5%	0.9%	Expands for the fifth month.
EUR	9:00	Euro-Zone Industrial New Orders (YoY) (FEB)	21.8%	21.3%
USD	11:00	MBA Mortgage Applications (APR 22)	--	-5.6%	Third contraction in the last four weeks.
EUR	12:00	German CPI (MoM) (APR P)	0.2%	0.2%	Fastest pace of growth since October 2008, fueling bets for higher interest rates.
EUR	12:00	German CPI (YoY) (APR P)	2.4%	2.4%
EUR	12:00	German CPI - EU Harmonised (MoM) (APR P)	0.2%	0.2%
EUR	12:00	German CPI - EU Harmonised (YoY) (APR P)	2.6%	2.6%

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