Dovish BoE Minutes May Not Have Lasting Impact on British Pound US Dollar to Rise if Fed Reserve Opts Not to Increase Balance Sheet Currency markets languished in quiet consolidation throughout the overnight session as traders braced for the upcomingFederal Reserve monetary policy announcement set to cross the wires at 18:15 GMT. As we discussed in detail in ourfundamental trends monitor, we expect Ben Bernanke and company to disappoint hopes for another round of asset purchases (dubbed “QE3”) in favor of a less aggressive approach that eschews unconventional tools in favor a focus on more familiar variables. A number of policy options are possible, from implementing a scheme labeled “Operation Twist” that seeks to push long-term rates lower by steering the Fed’s reinvestment of proceeds from maturing assets toward bonds of further-out maturities, to cutting the rate banks are paid on excess reserves as a way to stoke lending. Broadly speaking, anything that falls short of an outright expansion of the central bank’s balance sheet is likely to weigh on risk appetite (as well as ongold prices) and prove supportive for theUS Dollar against its major counterparts. The release of minutes from September’sBank of England monetary policy meeting headlines the economic calendar in European hours. Traderswill be keen to gauge the evolution of the dovish lean on the rate-setting MPC committee to see if perhapsanother round of QE is on the horizon. A gauge tracking the pulse of UK economic data from Citigroup suggests deteriorating metrics between the August and September policy meetings may have in fact encouraged more policymakers to speak up in favor of further stimulus. However, the same gauge points to an improvement in data flow since the meeting this month, so the implications of whatever was said at that sit-down for the probability of a dovish policy change in October may be limited. As such, anyBritish Pound weakness following the release may prove short-lived, particularly as the Euro Zone debt crisis continues to underpin demand for Sterling as a regional alternative to the single currency following the loss of the Swiss Franc as a safe haven in the aftermath of aggressive SNB intervention.

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