British Pound Remains Bid Following BoE Comments, Euro Approaching Yearly High

The British pound continued to retrace the sell-off from the previous week and crossed back above the 20-Day SMA (1.6636) to reach a high of 1.6684, and may hold a broad range throughout the remainder of the week as investors weigh the outlook for future policy. Meanwhile, Bank of England Chief Economist Spencer Dale held a hawkish outlook for inflation and said that the expansion in the asset purchase program paired with record-low interest rates “increases the likelihood that asset prices may move out of line with their fundamental values.”

As a result, Mr. Dale anticipates price pressures to rise “sharply” over the near-term and went onto say that “it is quite possible that the governor (Mervyn King) will have to write a letter to the chancellor (Alistair Darling) early in the New Year explaining why inflation is more than 1 percentage point above the inflation target.” At the same time, the chief economists said that economic activity has “begun to stabilize” and sees the nation “moving into a period of renewed expansion” as policy makers take unprecedented steps to stimulate the ailing economy. Meanwhile, the economic docket showed building activity in the U.K. weakened at a slower pace in November as the PMI reading increased to 47.0 from 46.2, and conditions are likely to improve going into the following year as the central bank sees the nation emerging from its worst recession since the post-war period.

The Euro advanced against the greenback for the third-day to reach a high of 1.5111, and looks poised to test the yearly high at 1.5146 as the single-currency continues to benefit from the rise in risk appetite. As the rally remains well-supported by the 50-Day SMA at 1.4858, we may see the EUR/USD continue to retrace sharp decline from August 2008 as market sentiment improves. Nevertheless, producer prices in the Euro-Zone increased 0.2% in October amid expectations for a flat reading, while the annualized rate slipped 6.7% from the previous year after tumbling a revised 7.6% in September to mark the tenth consecutive monthly decline. The breakdown of the report showed the cost of energy increased 1.0% during the month to lead the index higher, while prices for non-durable goods slipped 0.3% after falling 0.1% in September.

The U.S. dollar weakened against most of its major counterparts as market participants moved into higher-yielding investments, and the rise in risk appetite is likely to drive to drive the greenback lower going into the North American trade as the it remains the most popular funding-currency, next to the Japanese Yen. Nevertheless, the ADP employment report for November is expected to show a 150K drop in private payrolls following the 203K decline in the previous month, while Treasury Secretary Timothy Geithner is schedule to testify in front of the Senate Agricultural Committee on the over-the-counter (OTC) derivatives market at 14:30 GMT. Moreover, the Fed’s Beige Book will cross the wires at 19:00 GMT, and comments from the central bank are likely to move the currency market as investors weigh the outlook for future policy.