The British Pound bounced back from a low of 1.5448 during the European trade as Bank of England Governor Mervyn King endorsed the austerity measures taken by the new coalition in the U.K., and the exchange rate may continue to push higher throughout the day as it pares the overnight decline. The GBP/USD crossed back above the 50-Day SMA (1.5497) ahead of the U.S. session to remain little changed from the previous day, and the pair may look to test the upper bounds of the 1.5300-1.5600 range again for short-term resistance. Meanwhile, Mr. King said that the budget deficit in Britain is “clearly unsustainable” and said the government needs a credible plan to balance its public finances as the global financial market remains fragile. The central bank head went onto say monetary policy can help to balance the risks for the region if the recovery continues to lose strength, but investors seem to be overlooking the dovish comments by the Governor as other members of the MPC see scope to lift the benchmark interest rate off the record-low. However, the economic docket showed jobless claims in the U.K. unexpectedly increased 2.3K in August to mark the first advance since January, and policy makers may look to maintain the expansion in monetary policy throughout the remainder of the year as the economic outlook remains clouded with uncertainties. Nevertheless, we still expect MPC board member Andrew Sentance to dissent against the majority and push for a 25bp rate hike as price growth continues to hold above the government’s 3% limit for inflation. As investors weigh the prospects for future policy, the GBP/USD may trade within its recent range throughout the remainder of the week as the BoE is scheduled to release its policy meeting minutes on September 22. The Euro appears to be regaining its footing as the exchange rate rebounded from a low of 1.2954, and the single-currency may continue to pare the overnight decline as it breaks out of the narrow range carried over from the previous month. Daily studies suggests the near-term rally in the EUR/USD may gather pace going forward as continues to retrace the decline from the previous month, and we may see the exchange rate work its way towards the 200-Day SMA at 1.3252 in the days ahead if we see the anti-dollar sentiment gather pace. Meanwhile, the headline reading for inflation in the Euro-Zone slipped to 1.6% in August, which was largely in-line with forecast, and subdued price growth would certainly allow the European Central Bank to maintain a loose policy stance over the medium-term. As interest rate expectations fade, subdued speculation for a rate hike limits the likelihood for a big breakout in the single-currency, and price action may fail to retrace the decline from the previous month as policy makers maintain a cautious outlook for the region. The greenback bounced back against most of its major counterparts after taking a beating during the previous day’s trade, while the USD/JPY surged to a high of 85.51 as the Bank of Japan intervened in the foreign exchange market to stem the marked appreciation in the low-yielding currency. As we head into the U.S. trade, the dollar is likely to face increased volatility as the economic docket is expected to show industrial outputs increasing 0.2% in August paired with a 0.3% rise in import prices. However, as the anti-dollar sentiment fades, the greenback may continue to recoup the sharp losses from the previous day as it gains ground against all of the major currencies except for the British Pound.

Source