BoE Report Shows Steady Inflation Expectations
UK central bank’s survey published just now indicated that consumers’ on average are expecting inflation to be 2% over the next year, which is not in line with the Bank of England’s (BoE) inflation view. The minutes of yesterday’s BoE monetary policy meeting echoed a line from its November statement that the headline inflation will stay below 1% in the first half of 2016. The minutes noted that returning inflation to its desired target would depend on an increase in domestic cost pressures.
The Federal Reserve’s (Fed) policy meeting is scheduled next week and markets will face the final hurdle today in the form of a string of key US economic releases such as retail sales data, producer prices and Michigan University’s consumer sentiment report in the session ahead.
Pound Sterling – UK Markets
The Pound came under severe pressure against the US Dollar yesterday as market hopes were once again dampened after the Bank of England officials left monetary policy unchanged, with Ian McCafferty the only hawk against eight members voting for rates to remain on hold. Though the exchange rate today decision was widely anticipated, traders focus was on the minutes of the meeting published alongside the decision for signs of a shift in sentiment. The minutes, however, failed to provide any cues as to when an interest rate rise might be on the cards, disappointing market participants who had hoped for a greater steering of expectations. Instead rate setters focused on a renewed drop in global energy prices and moderate wage growth in the UK economy, raising the likelihood of inflation staying subdued for a longer period. Also, news that October’s trade deficit had widened more than market estimates weighed on Sterling before the BoE rate announcement.
Sterling is trading in a close range against the greenback this morning. The just published BoE’s 12-month inflation report revealed inflation expectations among consumers remained steady in November.
US Dollar – US Markets
The US Dollar is looking for direction against the Pound this morning, with a set of major US economic reports coming down to the wire ahead of the Fed’s monetary policy meeting next week. Expectations are for the US retail sales growth to slightly pick up in November, after it had fallen shy of market estimates in the previous month. Consumer spending is the backbone of the US economy and rising wages, payroll growth and falling gas prices must have led to faster retail sales growth last month. Also, the holiday retail season that began with Thanksgiving could show a surge in consumer spending. In separate data, US headline producer prices are expected to have risen in November, but with inflation again nowhere in sight.
Additionally, a first look of the University of Michigan’s consumer morale survey for December is projected to show that the sentiment index nudged slightly lower from a month ago. It will be interesting to watch whether today’s reports will have any influence on the Fed’s decision about the pace of policy tightening.
Euro – European Markets
The common currency dipped below the 1.10 mark against the US Dollar yesterday, calming down after a lower than expected monetary easing package delivered by the European Central Bank (ECB) late last week had disappointed Euro traders. The ECB President, Mario Draghi had tried his best to talk his way out of the rout, but the currency pair held on to its recent gains most of this week. Also, the central bank member, Yves Mersch, late yesterday left the door open for further easing by stating that the ECB will use all the possible policy tools at its disposal to support the economy. He shed light on the difficult position of the ECB that has been trying to pump in more money into the Euro zone economy, while the Fed prepares to raise its key interest rates. He highlighted that a rate rise by the US central bank could have consequences in the emerging markets.
On the data front, the just out final November German inflation data showed that consumer prices rose at the fastest pace in six months as earlier thought.
Other Currencies – Highlights
The Kiwi Dollar has currently surrendered some of its losses against the greenback. The New Zealand Dollar has halted its winning streak from Wednesday when the Reserve Bank of New Zealand (RBNZ) had signalled that its quarter point reduction in interest rates to 2.50% was likely to be the last in the current cycle. Meanwhile, strong local data released after RBNZ’s rate decision hardly supported the New Zealand Dollar against its major currency counterparts. New Zealand manufacturing activity as measured by the Business-NZ manufacturing performance index picked up in November, signalling that the nation’s economy grew at the fastest pace in the second half of the year. Improvement was seen across all of the five sub-components of the index, with new orders growth at a five-month high. Moving ahead, the currency pair could turn lower if crucial economic releases in the US today come in stronger than expected while heading into next week’s Fed meeting.
Going forward, investors will eye Westpac’s quarterly consumer sentiment survey and growth data in New Zealand due next week.