Euro, British Pound Remains Bid Ahead of Fed's Beige Book

The British pound tipped higher against the U.S. dollar for the second-day after finding intraday support ahead of the 50-Day moving average (1.6442) however, the GBP/USD may hold a narrow range ahead of the Bank of England interest rate decision as investors anticipate the central bank to hold the benchmark interest rate at the record-low of 0.50%.

Talking Points

· Japanese Yen: Leading Index Improves for Fourth Month in July
· Pound: Trade Deficit Remains Little Changed in July
· Euro: German Annualized CPI Holds Flat in August
· US Dollar: Fed’s Beige Book on Tap

The British pound tipped higher against the U.S. dollar for the second-day after finding intraday support ahead of the 50-Day moving average (1.6442) however, the GBP/USD may hold a narrow range ahead of the Bank of England interest rate decision as investors anticipate the central bank to hold the benchmark interest rate at the record-low of 0.50%. Credit Suisse overnight index swaps a 2% chance for a rate hike tomorrow, while investors anticipate the BoE to raise borrowing costs by more than 75bp over the next 12 months as the outlook for growth and inflation improves

The U.K. visible trade deficit narrowed slightly to GBP 6.479B in July from a revised reading of GBP 6.515B in the previous month, while the total deficit unexpectedly widened to GBP 2.447B from GBP 2.366B in June. A deeper look at the report showed exports increased 5.0% from June, with imports climbing 3.5% during the month, and the recent depreciation in the British pound should help to lower the deficit over the coming months as the lower exchange rate increases the competitiveness of U.K. goods. Nevertheless, as the Bank of England is scheduled to announce its rate decision at 11:00 GMT tomorrow and is widely expected to hold the benchmark interest rate at the record-low, the GBP/USD may continue to hold a tight range over the next 24 hours of trading as investors weigh the outlook for future policy.

The euro advanced against the greenback for the fourth consecutive day but failed to push above the yearly high (1.4537) after stalling at 1.4521 during the overnight session. Meanwhile, the final CPI reading for Germany showed prices increased 0.2% in August, with the headline reading for inflation holding flat from the previous year, and price pressures are likely to remain subdued throughout the second-half of the year as the region faces its worst economic downturn in over half a century. Nevertheless, ECB board member Erkki Liikanen encouraged an enhanced outlook for future growth, stating that the central bank’s monthly forecast suggests that the Euro-Zone may emerge from the recession in the third-quarter as economic activity in Germany and France improves, with Christian Noyer seeing a faster recovery in the French economy than initially expected. As the Governing Council holds an improved economic outlook for the Euro-Zone, long-term expectations for higher interest rates may continue to drive the exchange rate higher as investors speculate the ECB to tighten policy over the next 12 months.

U.S. dollar price action was mixed overnight as investors lowered their temperament for higher yielding assets, and the greenback may strengthen against its higher-yielding counterparts as equity futures foreshadow a lower open for the U.S. market. At the same time, the Fed’s Beige book is due out at 18:00 GMT today, and the central bank is likely to hold an enhanced outlook for future growth as policy makers anticipate economic activity to improve throughout the second half of the year. As a result, the greenback is likely to face increased volatility following the release as market participants weigh the outlook for future policy, and the reserve currency may push higher against its currency counterparts following the drop in risk appetite.