The BoE minutes showed the MPC voted 8-1 to hold the benchmark interest rate at 0.50% and maintain its asset purchase target at GBP 200B, while board member Andrew Sentance voted for a 25bp rate hike, which was largely in-line with expectations. Some members of the board said that the downside risks for growth has increased as they expect the economic recovery to temper off throughout the second-half of the year, and the central bank went onto say that the risks for inflation have not “materially” changed in recent months. The BoE noted that monetary policy could be moved in either direction as the outlook remains clouded with uncertainties, and pledged to take the appropriate steps going forward as it aims to balance the risks for the region. As the MPC maintains a neutral outlook for future policy, the GBP/USD may give back the recent rally in the exchange rate as price action fails to hold above the 38.2% Fibonacci retracement from the 2009 low to high around 1.5700. As a result, we may see the pound-dollar consolidate in the days ahead, which could leave the pair range bound between the 50.0% and 38.2% Fibs around 1.5275 – 1.5700 going into the following month. However, if we see the stickiness in price growth continue to hold up throughout the second-half of the year, there is likely to be increased pressures on the central bank to start normalizing monetary policy as inflation erodes purchasing power for households. The Euro extended the advance from the previous day and rallied to a fresh monthly high of 1.3395 on the back of U.S. dollar weakness, and the exchange rate may continue to pare the decline from earlier this year as it breaks above the August high. If the bearish sentiment towards the greenback carries into the U.S. trade, we may see the exchange rate work its way towards 1.3500, the 50.0% Fibonacci of the 2009 high to the 2010 low. However, as market sentiment comes under pressure, we may see the Euro come off its high throughout the day as risk sentiment continues to drive price action in the currency market. Meanwhile, the economic docket showed industrial new orders in the Euro-Zone slumped 2.4% in July, which exceeded forecasts for a 1.4% decline, and the slowdown in demands may lead the European Central Bank to support the economy going into 2011 as it aims to encourage a sustainable recovery. The greenback weakened across the board, with the USD/JPY tumbling to a low of 84.51, and risk sentiment is likely to drive price action throughout the North American trade as the economic docket remains fairly light for Wednesday. Equity futures are foreshadowing a lower open for the U.S. market as the stock markets in Europe come under pressure, and the greenback may pare some of its losses as it continues to benefit from safe-haven flows. Nevertheless, the house price index for the world’s largest economy is projected to contract 0.2% in July after falling 0.3% in the previous month, and the data is likely to instill a weakening outlook for future growth as the private sector remains weak.

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