FOREX-Dollar supported before Fed, BoE minutes could help sterling

Wed Jun 18, 2014 3:41am EDT

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* Upside inflation surprise helps lift demand for USD

* Market awaits Fed meeting outcome, Yellen news conference

* Sterling firm near 5-yr high, hawkish BoE minutes expected

By Anirban Nag

LONDON, June 18 (Reuters) - The dollar held its gains on Wednesday after a broad firming on the back of higher-than-expected U.S. consumer prices for May that has fanned speculation that the Federal Reserve may inch closer towards hiking interest rates.

In the European session, the focus will be on the minutes from the Bank of England's last policy meeting. The tone of recent comments from policymakers, including Governor Mark Carney, has bolstered expectations that the minutes will be hawkish and could push sterling towards the $1.70 mark.

The dollar index last stood at 80.613, having climbed 0.2 percent on Tuesday. Against the yen, the greenback reached a one-week high of 102.31, while the euro retreated from a one-week peak hit on Tuesday to trade flat at $1.3550.

The U.S. consumer price index rose 0.4 percent in May, double what economists had expected, raising the possibility that a separate inflation gauge watched by the Federal Reserve also pushed higher in May.

The pick-up in inflation came as Fed policymakers prepared to conclude a two-day meeting. The Fed is widely expected to chop another $10 billion from its monthly bond purchases, but is considered unlikely to make other concrete policy moves.

"We are expecting the Fed to raise their inflation forecasts, but that is more or less expected," said Yujiro Goto, currency analyst at Nomura, London.

"Clearly the momentum is picking up in the U.S. and we are expecting the Fed to become more hawkish in the third quarter. Hence we are recommending buying the dollar against low-yielding currencies like the yen."

The focus will be on Fed Chair Janet Yellen's news conference for any clues to longer-term plans for rates. She is expected to provide a more balanced view on the future path of interest rates, but any hawkish hints could send Treasury yields soaring and help the dollar.

"It's been a while since Yellen's last conference. So markets will be keen to know what she thinks of the economy after this inflation data," said Takako Masai, executive officer at Shinsei Bank.

A recent Reuters poll found a majority of Wall Street's top bond firms do not see the Fed raising rates before the second half of next year.

FOCUS ON THE BOE

Sterling was firm against the dollar and the euro before the release of the BoE minutes. It was up 0.1 percent at $1.6985 , while the euro was slightly weaker at 79.80 pence .

The pound crossed the $1.70 level on Monday for the first time in nearly five years as investors added to bullish bets on the currency. It gave up some gains on Tuesday after softer-than-expected UK inflation, but expectations that the BoE could act before the Fed in raising rates provided support.

Governor Carney surprised investors last Thursday by saying rates may rise before many were predicting, prompting investors to bring forward expectations for a first UK rate hike to before the end of this year from the first quarter of 2015.

"Investors' perception of a monetary policy committee bias leaning towards earlier removal of policy accommodation should dominate," said Adam Myers, European head of FX strategy at Credit Agricole.

"Indeed, coming off the back of an unambiguously hawkish statement from Governor Carney, we expect even tentative evidence in the minutes of a looming shift in voter complexion will benefit sterling as short-term interest rate spreads move in the currency's favour against both the euro and the dollar." (additional reporting by Hideyuki Sano in Tokyo; Editing by Gareth Jones)

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