Carney Links Rates to Wage Growth

The BoE Governor, Mark Carney, stated yesterday that policymakers will not act in haste to raise interest rates, highlighting overseas risks to domestic recovery and continued weakness in wages in the nation. This assumes importance in the wake of yesterday’s dismal wage growth data. Tomorrow’s economic growth release will now be keenly eyed for any revision, especially in the wake of the BoE hiking its 2014 GDP outlook. Across the Euro zone, weakness in economic activity was reflected in today’s growth data for the second quarter from key European nations, thereby raising expectations that the ECB would unveil further stimulus measure in order to boost recovery in the nation.

Pound Sterling – UK Markets

In the absence of major economic releases at home today, the Pound has continued to trade on a weaker footing against the majors, still trying to recover from yesterday’s dovish comments by the BoE Chief. While employment data yesterday was upbeat, with the number of people claiming jobless benefits in the nation falling more than expected for July, wage growth surprisingly fell for the three months ended June, the first time since 2009. This leaves market participants unclear about the state of the UK labour market and expectations of growth in the nation. Furthermore, the BoE Governor, Mark Carney, indicated that policymakers will not rush to raise interest rates, citing the rise in geopolitical risks, continuing structural adjustment in the Euro zone and disappointing domestic wage growth. Meanwhile, the BoE maintained its stance for an interest rate hike early next year but only if wage growth in the nation accelerates. Additionally, the central bank hiked its 2014 economic growth outlook to 3.5% from 3.4% previously estimated in May. Markets now keenly await tomorrow’s revised UK GDP data for the second quarter for further direction.

US Dollar – US Markets

A sharp reaction to the soft US retail sales data for July weakened the greenback against the Euro in yesterday’s trading session. The stagnant retail sales data was in sharp contrast to the positive cues emanating from the labour market in recent times. The conflicting trends were also visible in two gauges of consumer confidence for July, released earlier, one of which showed an improvement while the other deteriorated. Losses in the greenback were capped amid dismal data in the Euro zone and a soft guidance on interest rates by the BoE chief, yesterday. The US Dollar is trading in a tight range against the majors this morning. The only important economic release scheduled today is the US initial jobless claims data which is expected to show a slight increase for the previous week. Markets will also eye developments on the geopolitical front for changing trends in risk appetite.

Euro – European Markets

In line with last week’s Italian GDP data, economic growth numbers from key European nations earlier today disappointed markets, leading the Euro to trade lower against its major counterparts. German GDP surprisingly contracted on a quarterly basis for the first time since 2012, while French economic growth stagnated during the second quarter, raising concerns about growth in the Euro area. Against this backdrop, markets will keep a close watch on today’s Euro zone GDP data. In the wake of subdued inflation from major European economies earlier this week, today’s Euro zone inflation number is widely expected to confirm a slowdown for June. The weak economic data of late in the Euro area is likely to raise calls for stimulus measures by the ECB to boost recovery in the region. Yesterday, the Euro advanced against the US Dollar following a dismal US retail sales report. However, a surprising drop in Euro zone industrial output capped gains in the common currency.

Other Currencies – Highlights

The Kiwi Dollar advanced against the greenback yesterday following soft US retail sales and mortgage applications data. Data released overnight in New Zealand showed that retail sales in the nation rose more than expected for the second quarter due to stronger than expected growth in automobile sales. In light of this and the upbeat labour market report released earlier this month, the nation’s GDP growth is anticipated to remain firmly positive for the second quarter. However, gains in the Kiwi Dollar were capped after another domestic release showed that the pace of manufacturing activity had slowed in July. Traders in the pair will keep an eye for developments on the geopolitical front, especially the US action in Iraq, which can influence trends in the New Zealand Dollar-US Dollar pair. Meanwhile, markets await next week’s inflation expectations in New Zealand for the third quarter, to gauge if the steep fall in dairy prices at the recently held Global Dairy Trade auction, has impacted the nation’s inflation. Last quarter, inflation in the nation had risen lower than anticipated due to a fall in dairy prices.