The Pound Might Weaken on BoE Minutes

By, David Frank, Chief Market Analyst, AvaFX

The British Pound had an interesting week. The Sterling fell against the Japanese Yen and the Dollar while it gained against the rest of the majors. The 1.68 percent loss against the Greenback was relatively modest compared to the Swiss Franc. Along with the British 10 year Gilt (equivalent to the U.S. 10-year Treasury Note) hitting a record low yield, it appears that the Sterling is becoming an alternative safe haven, a notion inferred since the Swiss National Bank implemented a floor on the EUR/CHF on September 6.

How will the Pound perform? Will it be the leader, in the middle of the pack or lose? Maybe, just maybe, the Sterling will perform in the middle. This outlook is predicated on two bases: first, there might be increased capital flows from the Euro into the Sterling (leading to Sterling strength); and second, the Bank of England has indicated it will increase its quantitative easing program as the British economy continues to stagger (leading to Sterling weakness). This week, this tug of war will be in the spotlight.

Although the Sterling finished the week unchanged against the Euro, as Euro zone tensions flare, additional strength appears on the horizon for one of the world’s oldest currency. Liquidity is starting to thin out quickly. In fact, interbank borrowing costs in the United Kingdom are at their highest cost since the 2008-2009 market crash. This might be a cause for concern.

Given these developments, the most important event of the week might be the Bank of England minutes. On November 10, the Bank of England’s Monetary Policy Committee (BoE MPC) decided to keep its monetary policy the same, with the key interest rate at 0.50 percent and the asset purchase program unchanged at £275 billion. However, the notes of the meeting might provide detailed look at the musings of the central bank’s policymakers. Given recent dovish commentary, the Sterling might face some headwinds before and maybe even following the release.

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