Foreign Exchange News
13 August 2014

BOE Inflation Report to Shape GBP Outlook

EUR/USD 1.3352
GBP/USD 1.6824
GBP/EUR 1.2601 (0.7936)
EUR/CHF 1.2138
GBP/CHF 1.5295
GBP/AUD 1.8125

Yesterday was quiet on the data front but despite a cool down in geopolitical tensions, global equity markets continued to struggle. In Europe a dismal German ZEW investor confidence print painted a bleak picture, falling to its lowest level since 2012 and sending European markets and the euro lower. The tone remained somewhat sombre entering the US session as US equity markets struggled for any gains and closed the day moderately lower while at the same time the USD also gave back some of its recent advance. Overnight the tone has remained mixed through the Asian session, the AUD advanced following a rise in consumer confidence while in Japan the JPY held a two day slide as 2nd quarter GDP figures declined by less than expected.

Volatility for GBP pairs is likely to be high today given the amount of event risk we have across the wires today. First up this morning we have labour market data due with the unemployment rate expected to decline to 6.4%, while real wage growth is expected to remain unchanged at .7%. This is where the problem lies for the BOE, while on first glance a falling unemployment rate paints a good picture of labour markets, wage growth has remained subdued and has been highlighted by BOE members as a concern.

While we may see some short term reactions from GBP crosses following the labour market data, the big event of the day for the pound comes from the release of the BOE inflation report. This quarterly report carries with it details that are most likely, or capable of changing the fundamental picture for GBP, and most importantly impacting timing of rate hikes, which has been the primary driver of GBP weakness/strength over the last year. We will be receiving forecasts for inflation growth, should we have any shift in growth expectations or concerns on inflation we will likely see GBP react accordingly. Lower than forecast inflation may well see GBP sellers back in the market, while an indication inflation will be hitting the 2% target will see those calling for rate hikes buying GBP and lifting sterling pairs.

The EUR tested recent lows against the USD yesterday, following the weaker than expected ZEW investor confidence survey from Germany. The reading for August more than halved, posting 23.7 versus 48.1 in July which exaggerates the turn on confidence across the region from earlier in the year. Without the pull of investor confidence, which was a source of plenty of EUR strength through the first 4 months of the year (as investors lapped up peripheral debt), the EUR could be vulnerable to investor liquidating the EUR assets should the region face further troubles. Eurozone Industrial production crosses the wires this morning with growth expected to have slowed to .2% through June from .5% previously. Larger focus will be on GDP prints coming from the region over the next three days, especially following Italy’s decline into another recession confirmed last week.

The USD attempt to break out of its two week range proved feeble and the greenback has since given up some of that ground. US data has been light this week but we should see some further insights into the US economy, or at least the consumers perception of it through Retail sales and mortgage application data. There are a number of Fed speakers on wholesale funding this evening, while inventory data is also due across the wires. Major US data this week however does not necessarily carry the weight to shape Fed outlook so we may see the USD continue in consolidation for the rest of the week unless risk flows deem otherwise.

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