Market News & Insights
12 November 2014

GBP At Risk Should BOE Take Dovish Stance

EUR/USD 1.2445
GBP/USD 1.5919
GBP/EUR 1.2795 (0.7816)
EUR/CHF 1.2027
GBP/CHF 1.5391
GBP/AUD 1.8313

Yesterday was very quiet on the data front and there was not much in the way of headline grabbing news. Once again stronger earnings from European companies helped lift equities, in the US markets were open despite the holiday but participation was noticeably down, that didn’t stop stocks pushing higher however with the S&P advancing for the 5th straight day, albeit by a mere .1%, topping the longest rally since June. In currency markets USDJPY carried most of the days volatility as the pair swayed between news reports suggesting Vat hikes would be postponed and an early election would be called. This was later played down by Japanese officials who were unwilling to provide any confirmation. Overnight, stocks in Asia followed the global trend this week for higher equities, in China stocks rose for the third straight day, next week sees mainland stocks open to outside investors. Overnight GBP has been firmer, pushing above 1.5900 against the USD while trading back from overnight highs around .7845 against the Euro. The USD traded lower over the last 24 hours, giving back Monday’s small gains.

All eyes today will be on the UK. Data scheduled for release carries massive implication for BOE policy and as such future interest rate expectations for the UK. First up is UK unemployment data, the headline figure here has been steadily improving and the unemployment rate is expected to drop to 5.9% which represents a six year low. What has been concerning is the make up of this figure, while more people do appear to be in the labour market the number of part time workers has grown while wage growth has remained well below an already low inflation number. Improvements in the make-up of this figure will no doubt see GBP strengthen but the BOE’s inflation report carries significantly more weight in terms of GBP direction.

The BOE’s quarterly inflation report is our best chance to gain insight into BOE policy and outlook. There has been a noticeable balancing of BOE rhetoric over the last 4 months and as such we have seen UK interest rate hikes expectations pulled back, with the first rate hikes now priced into mid summer next year. There certainly appears to be a dovish bias heading into the release of the report, markets expect some downward revisions to growth and inflation forecasts, should the BOE speak of a more balanced and prolonged recovery then the market is likely to take this as dovish which will be a negative for GBP pairs. With a market facing a negative bias from the BOE anything more positive will likely see a rally in GBP pairs but there are arguments for both cases. In the UK consumption and inflation have been on the decline which would suggest a dovish stance, however we have seen growth remain firm, albeit not as fast as the first half of the year, while as mentioned above labour market data has been improving and productions figures remain firm. This event caries serious implication for GBP direction into the New Year and as such is sure to bring with it some serious volatility to GBP pairs.

Data from Europe has been quiet and the EUR has tended to be shaped by more dominant risk trends. The larger focus remains on potential ECB action, with further prolonged easing expected it is difficult for the EUR to hold any meaningful rally. The expectations for Eurozone data is already on the low side, even data releases that are firmer than expected can only get a very short rally from EUR pairs, if at all. As such, looking at today’s calendar Industrial production figures are set to decline .2%, again the impact of this release will likely be muted, especially with Mario Draghi due to speak in Rome and everyone will be looking for clues on their covered bond purchase targets, and if /when any ABS purchases may begin.

FX volatility has been noticeably lower this week and overall the USD is also lower. Data from the US is relatively light again this evening and with Draghi speaking in Europe and Carney and the BOE due from the UK, the greenback will likely play second fiddle to the actions of other central banks. EURUSD has traded higher from its lows last week but thus far remains capped at 1.2500. GBPUSD has broken back above short term trend support and is currently trying to hold above 1.5900 but with major UK data due across the morning consolidation is likely ahead of the releases.