Market News & Insights
13 November 2013

GBP Faces BOE Inflation Report

EUR/USD 1.3428
GBP/USD 1.5890
GBP/EUR 1.1833 (0.8450)
EUR/CHF 1.2319
GBP/CHF 1.4578
GBP/AUD 1.7111

The landslide of big (surprise) data last week and a US bank holiday on Monday has meant markets have been somewhat muted, content to absorb last week’s news. The USD remains firm following on from last week’s shockingly good Non Farm Payrolls, which has seen expectations rising for a December taper as it appears the Federal shutdown and debt ceiling issues had no negative effect on the jobs market. US equities faced selling pressure yesterday as the threat of removal of stimulus saw investors taking profit on the recent strong run.

The UK economy continues to show signs of growth and certainly at this stage it appears that economic growth is well ahead of the curve with respect to forward guidance provided by Mark Carney and the BOE but the pound has been one of the weaker currencies over the last couple of days. It faced selling pressure post NFP’s as USD demand saw GBP lose out to its more liquid counterparts, it has been giving back much of the ground gained against the Euro following on from Thursday’s surprise ECB interest rate cut and yesterday’s weaker than expected inflation data saw the pound under pressure across the board.

UK Inflation fell to 2.2% from 2.7% in September to the lowest level in four years and whilst the BOE have long been saying inflation will fall back in line with their 2% target and the large drop caught some off guard. The lower than expected figure saw some traders push back their interest rate increase expectations as inflationary pressures subsided. This is supportive of the BOE’s former guidance but that may well all change today as we expect the BOE Quarterly Inflation report.

This will be the true test for GBP as the BOE update their growth and inflation forecasts along with their forward guidance policy. Should they re-iterate their view that rates will remain at all time lows into 2016 we will likely see GBP under further selling pressure. Any indication of a change in forward guidance may well give the pound some lift, at least let it clawed back some of yesterday’s losses as real market interest rates are already indicating a 2015 rate increase. UK employment data is out in advance of the inflation report but will likely play second fiddle to the larger event.

The Euro has been surprisingly strong in the early part of this week following two weeks of heavy selling pressure post weak Inflation data and then last week’s interest rate cut. Weaker than expected consumer price inflation from Germany yesterday had little effect on the single currency. This could easily be classified as a slight rebound for the euro and the phrase “dead cat bounce” comes to mind, we have long warned that the EUR was overvalued with much negativity in the economy ignored simply because the region appeared to no longer carry a threat of a break up. Economic performance has been subdues to say the least and tomorrows GDP reading leaves the Euro in a very vulnerable position should the figure be weaker than expected.

Taking a look at the technical’s we have seen a strong bounce of .8300 in EURGBP last week, to trade up just short of resistance above .8475, closer support below is around .8400 but the next two days can be key to EURGBP trend development. The .8300 level comes in line with 2013 support and will take a good push to break below.

GBPUSD has well and truly come back from its recent highs with support below at 1.5850. The break and hold below 1.6000 is telling for GBPUSD and resistance to the topside comes in ahead of this level around 1.5975/90. We’ll be looking for a break of these levels for a new outlook.

EURUSD has faced strong selling pressure as the Euro has been hit by weak data and interest rate cuts. Increased demand for USD has also driven the pair lower with support now at 1.3350 with a sell zone around the 1.3500 area.