An urge to sell dollars ahead of the Federal Reserve monetary policy decision later Wednesday allowed the pound to rebound against the buck after a sharp selloff in the wake of the Bank of England minutes.
The Federal Open Market Committee decision, due at 12:30 p.m. Eastern and followed by a news conference by Fed Chairman Ben Bernanke, cast a long shadow over the European trading session Wednesday with some in the market hoping for another round of quantitative easing.
"QE3 seemed almost completely off the agenda just a few weeks ago but many now believe that the Fed might announce further measures as early as this evening. This is putting increasing pressure on the dollar," said Lutz Karpowitz, chief currency strategist at Commerzbank in Frankfurt.
The pound, which was the biggest mover among the major currencies Wednesday, had dropped sharply against both the dollar and the euro Wednesday after minutes from the Bank of England's June MPC meeting showed a narrow vote in favor of keeping its asset purchase program unchanged, raising the probability of additional easing in July.
Yet sterling snapped back against the dollar to above $1.57, having traded at the day's low of $1.5654. It also regained some lost ground against the euro, which fell back from the day's highs. Strategists attributed this rebound partly to bets made by investors ahead of the FOMC.
"With people thinking we might see some [more quantitative easing] from the Fed tonight, they have taken advantage of the fall in the pound to jump in," said Sara Yates, currency strategist at Barclays BCS +2.45% in London. She added that there was a lot of retail demand to buy the pound around the day's lows.
The prospect of more QE in the U.K. might also help sterling in the long-run, said Daragh Maher, senior currency strategist at HSBC HBC +1.07% in London. "The initial reaction on the suggestion that more QE is coming is to sell sterling, but actually QE is about supporting growth, so longer term, it should be sterling-supportive, and I think that's why it has bounced back," he explained.
With currency traders broadly biased toward selling dollars, the euro and the Australian dollar were also able to notch up some moderate gains against the greenback. The common currency traded back above $1.27 against the dollar but was unable to sustain this level.
In Europe's emerging markets, the overall brighter tone provided early support. The Turkish lira also benefited from the one-notch upgrade of its sovereign debt rating by Moody's Investor Services to Ba1—just below investment grade.
In early New York trade, the euro was at $1.2703 compared with $1.2686 late Tuesday. The dollar was at ¥79.36 from ¥78.95, while the euro was at ¥100.80 compared with ¥100.14. Meanwhile, the pound was trading at $1.5739 compared with $1.5725.
