British Pound Rallies after Minutes Back Improving Economy

While Euro, gold and crude oil investors were waiting to react to news from the Fed later in the afternoon, the GBP/USD surged after the Bank of England’s September meeting Minutes showed a shift in policymaker’s outlook on the U.K. economy.

The minutes show that monetary policy committee members believe the U.K. economy is improving faster than anticipated. Some may argue it is in the early stages of a sustainable recovery. Because of this, BoE members voted 9 – 0 against additional bond purchases. This news helped trigger a surge in the GBP/USD to a new high for the month.

The EUR/USD finished lower while maintaining an inside range. The chart pattern suggests investor indecision ahead of the Fed announcement. Fundamentally, the Euro should feel pressure against the dollar, if the U.S. economy continues to improve. The decision to cut stimulus by the Fed will be a strong sign the economy is recovering. At the same time the European Central Bank is considering additional stimulus. The size of the Fed reduction in stimulus will send a signal to traders as to the strength of the economy. A cut of $15 billion or more could be bearish for the EUR/USD.

December Gold continued to get pounded overnight. The lifting of uncertainty regarding the Fed’s decision to taper its monetary stimulus and the end of the threat of an attack on Syria by the U.S. are two reasons why speculators and hedgers are liquidating their long positions.

Downside momentum is increasing, making a test of the August bottom at $1271.80 a strong possibility. Oversold conditions could trigger a short-covering rally later in the session, but this has to be accompanied by a smaller than expected reduction by the Fed.

November crude oil futures finished higher after an early session setback. This morning, the Energy Information Administration gave the market a boost when it reported U.S. Crude Oil Inventories fell to a seasonally adjusted annual rate of 4.368M from .219M in the preceding month. Analysts had expected a decline of 1.394 last month.

Crude oil prices have been under pressure because of the diminished threat of an attack on Syria by the U.S. The market could fall further if the Fed announces a greater than expected reduction in stimulus later today.

Later today, traders will get the opportunity to react to the latest U.S. Federal Reserve Monetary Policy Statement. Expectations are for the Fed to announce a reduction of $10 to $15 billion in its current $85 billion per month monetary stimulus. The markets have already priced in this range. A greater than expected cut should trigger a rally in the dollar, pressuring foreign currencies and commodities. Look for currencies and commodities to soar if the central bank reduces by a smaller amount or if it refrains from any tapering.