BoE Quarterly Inflation Report in Spotlight

Data just released indicates that UK unemployment rate fell as expected, while the number of people claiming jobless benefits rose unexpectedly. It remains to be seen whether the latest jobless claims data is a temporary blip in an otherwise steadily improving domestic labour market. Additionally, subdued wage growth continues to undermine expectations for a sooner than anticipated rate hike. Going forward, markets will keenly scrutinise today’s BoE quarterly inflation report to gauge outlook for inflation and growth. With signs of slowing inflation and economic activity in the Euro region, it remains to be seen whether the ECB adopts further stimulus measures going forward to boost recovery in the region. Across the Atlantic, retail sales numbers along with the comments from Fed officials will keep investors on their toes.

Pound Sterling – UK Markets

The just released labour market report indicated that the UK unemployment rate dropped to 6.4% for the three months period ended June. However, the number of people seeking jobless benefits rose unexpectedly for July. The Pound has shown little reaction against its major peers to the mixed labour market data. Meanwhile, market attention has now shifted to the BoE’s Quarterly Inflation Report, to be presented today by the Governor, Mark Carney, wherein investors will closely monitor whether there are any revisions to the inflation and GDP outlook by the central bank. The recent upbeat domestic economic reports have raised hopes for a sooner than expected hike in interest rates, however slow wage growth and today’s rise in claimant count have poured cold water on these expectations. Meanwhile, investors will keep a close watch on the US retail sales data along with the comments from some key Fed officials later today for further direction to risk appetite. Additionally, later this week, revised UK GDP growth numbers will keep market participants on their toes.

US Dollar – US Markets

The US Dollar is trading in a tight range against its major counterparts this morning. Markets will keep an eye on today’s US retail sales data which is expected to show a slight rise for July. An index of national chain-store sales, released last week by Redbook, had indicated a drop of 0.4% in July, suggesting that consumer spending trends remain weak in the US. Markets will also keep a tab on this week’s Reuters/Michigan consumer optimism survey for August, set for release on Friday, to gauge for signs of improvement in domestic sentiment. Additionally, traders will await speeches by key US Fed Officials today, given mixed signs of economic recovery in the nation lately. Meanwhile, tomorrow’s Euro zone GDP data estimate for the second quarter will be crucial for the Euro-US Dollar pair. The greenback lost ground against the majors in yesterday’s trading session following mixed set of economic data in the US. While NFIB’s small businesses morale survey missed expectations, job openings recorded a 13-year high.

Euro – European Markets

The Euro is trading in a tight range against its key counterparts after data released earlier today indicated that consumer price inflation across key European economies for July continued to show an easing trend on expected lines. While Spanish and French consumer prices dropped, prices in Germany advanced. This follows the disappointing Euro zone and German ZEW sentiment reports which dragged the Euro lower against its major counterparts in yesterday’s trading session. German investor confidence dropped more than expected for August, hitting its lowest level since December 2012, as a persistent crisis in Ukraine and sluggish Euro area recovery impacted sentiment. Going forward, market participants will keep a close watch on tomorrow’s GDP numbers from most of the European nations. Weak economic reports in the region of late are likely to add pressure on the ECB to act, especially in the wake of comments from the ECB Chief, stating that the policymakers stand pat on their decision to unveil stimulus if the inflation outlook in the region deteriorates further.

Other Currencies – Highlights

The Japanese Yen showed little reaction to the preliminary second quarter GDP data released earlier today and remained range bound against the greenback. The Japanese economy has shown the sharpest contraction for the second quarter since 2009, albeit the fall in the GDP was lesser than expected. The decline was mainly led by a more than anticipated deterioration in domestic consumption due to April’s sales tax hike. However, minutes of the latest BoJ policy meeting revealed that policymakers foresee a fading impact of the sales tax hike and remain confident that the nation’s inflation would reach the 2% target by 2015. The minutes further revealed that the central bank has lowered the nation’s growth forecast for 2014, as the outlook for Japanese exports remains subdued on the back of geopolitical tensions and weak demand across various parts of the world. Japanese machine orders data for June along with the US industrial production numbers and the Reuters/Michigan consumer confidence survey scheduled later this week is anticipated to provide further direction to the pair.