Sterling Struggles After Dovish Inflation Report
The BoE, in its quarterly inflation report released yesterday, downgraded Britain’s economic growth forecast for the next two years and indicated that consumer price inflation is likely to remain well below the central bank’s target rate for a prolonged period. This was accompanied by dovish comments from the BoE Governor which stoked concerns of a delay in the timing of an interest rate rise and weighed on the performance of Sterling against the majors. With no crucial macro events today to help market participants reassess their view towards the UK economy, next week’s inflation data will be eyed for further direction.
Across the Atlantic, today’s initial jobless claims data will be in focus, especially after the recent non-farm payrolls missed market expectations.
Pound Sterling – UK Markets
Sterling showed little reaction to yesterday’s UK labour market data which showed a less than expected job additions and a more than anticipated increase in the nation’s wage earnings for the third quarter. However, the Pound lost major ground against its peers yesterday and dropped below the 1.58 mark against the greenback following the release of the BoE’s quarterly inflation report. The central bank lowered the nation’s GDP forecast for the next two years and stated that the nation’s inflation rate is likely to fall to 1.1% in the first quarter of 2015 and remain below the central bank’s target of 2% for the coming three years. Additionally, the BoE Governor, Mark Carney, indicated that the central bank is expected to keep its accommodative monetary policy unchanged for a prolonged period as Britain is likely to get affected by the economic stagnation in Europe. The dovish tone of the central bank Chief and lower forecasts for the future bolstered expectations that the BoE is likely to keep its key interest rate unchanged until mid-2015.
With little on the domestic macroeconomic front today, Sterling is likely to take direction from global cues.
US Dollar – US Markets
The greenback is trading in a tight range against its major peers this morning. Market participants will eye today’s US initial jobless claims data for the previous week after the recent labour market report showed that growth in the nation’s non-farm payrolls was less than anticipated for October. Although today’s data is expected to show a marginal increase in the number of first time jobless claimants for the previous week, the number is likely to remain close to the pre-recession low. With most of the domestic macro triggers remaining upbeat and the labour market showing resilience to subdued global conditions, a downward surprise in today’s data is unlikely. A speech by the US Fed Chief, Janet Yellen, scheduled later today will also attract considerable attention to gauge the timing of an interest rate rise in the nation.
Tomorrow, traders will eye US retail sales data which is anticipated to show a rebound for October and confirm that morale among consumers improved last month. Additionally, the preliminary Reuters/Michigan reading for November is expected to indicate that consumer confidence in the US strengthened for a fourth straight month.
Euro – European Markets
Data released earlier today showed that the final consumer price inflation reading remained unchanged in Germany. However, with signs of a deflationary threat still hovering over the Euro bloc, prospects continued to build up that the ECB might add further stimulus measures in the region going forward. Additionally, the ECB monthly report indicated that apart from stimulus measures of the central bank, structural reforms by governments of individual European nations was needed to improve the region’s macro health. The Euro showed little reaction to today’s domestic macro events, although signs of escalating geopolitical tensions in Eastern Europe is likely to limit the upside in the single currency against the majors.
The Euro gained ground against the Pound yesterday following the release of dovish BoE inflation report. Furthermore, data showed that industrial production in Euro zone rebounded unexpectedly on an annual basis for September. Separately, the ECB Chief, Mario Draghi, reiterated that the central bank stands ready to further ease its monetary policy, if the region’s inflation outlook worsens.
Other Currencies – Highlights
The revised data released earlier today showed that Japanese industrial production rebounded firmly for September. Additionally, Ryuzo Miyao, a Bank of Japan board member, stated yesterday that the possibility of the central bank reaching its 2% inflation target next year has strengthened due to the recently announced additional stimulus measures. Market participants will now keep an eye on the Japanese macro data going forward to verify if these measures bring any improvement in consumer confidence. Meanwhile, the Japanese Yen continued to trade close to its seven year low against the greenback in today’s trading session amid reports that the Japanese Prime Minister, Shinzo Abe, might call for an early general election to gain more support and delay the sales tax hike.
Moving ahead, the preliminary Japanese GDP data for the third quarter scheduled over the weekend and next week’s BoJ policy meeting is likely to keep investors in the Japanese Yen interested. Additionally, retail sales and Reuters/Michigan consumer sentiment data in the US scheduled tomorrow will be eyed for further direction to risk appetite.