The pound dropped against the broadly stronger euro but consolidated against the dollar before the Bank of England releases Minutes from its October meeting. Market participants expect to see that MPC voted unanimously for resuming the QE as well as keeping the benchmark rate unchanged at 0.5%. However, with bleak economic outlook it is expected for the tone of the Minutes to be muted. The main focus of the report will be to anticipate the central bank’s stance on expanding asset purchase program beyond the GBP75 billion target. In a speech in Liverpool last night, BoE Governor Mervyn King said that governments are not doing enough to tackle the fundamental problems facing their economies. He said that the major problem during financial crisis was one of solvency of banks and of governments and not liquidity, and that global economy needs a “bold response” in order to solve the underlying problems. The Governor has acknowledged that many people find it odd that the MPC had expanded QE with inflation rising to 5.2% but reiterated the view that the inflation is at its peak on medium term. In conclusion, Sir Mervyn said that central banks should aim at returning interest rates to normal and lowering the budget deficits, though turmoil in Eurozone and slower growth will delay the process.
The euro gained across the board during the overnight trade on speculation that France and Germany are closer to an agreement to boost the size of Eurozone’s rescue fund to contain the region’s fiscal crisis. The Guardian newspaper has reported that two nations support increasing the size of the European Financial Stability Facility(EFSF) from 440 billion euros to 2 trillion euros ahead of a summit this weekend. European leaders prepare for a summit on Greek crisis on October 23 before G-20 leaders meet on November 3. The single currency sentiment was not dented even after Moodys Investor Services reduced Spain’s credit rating yesterday by two levels to A1 from Aa2. Expect for the euro to remain supported against its major rivals ahead of the EU summit this weekend as expansion of the EFSF could help continental banks to rebalance its capital.
The dollar dropped against its major rivals during Asian session on increased risk appetite and ahead of the inflation report scheduled for today. The US consumer prices are expected to have increased only by 0.3% in September after rising 0.4% in the previous reading, the smallest gain in three months. Also scheduled for today is the Housing Starts report with projections for the homebuilding to have rebounded in September from the slowest since May.
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