Market News & Insights
13 February 2014

Market lose faith in BOE Guidance

EUR/USD 1.3622
GBP/USD 1.6642
GBP/EUR 1.2217 (0.8185)
EUR/CHF 1.2221
GBP/CHF 1.4931
GBP/AUD 1.8594

GBP saw one of its biggest rallies in months following the BOE’s inflation report and the upgrade to the BOE’s forward guidance policy. The USD slid to its eighth day of losses, even despite a shift in risk sentiment overnight. The AUD tumbled 1% after unemployment data reached its highest levels in over 10 years and Asian equities were generally lower with European markets opening in the red.

The big event of the day was the BOE inflation report and we got just what we were expecting from the BOE, pounds reaction however has been a little against the grain. Mark Carney faced tough criticism for the unemployment rate linked to forward guidance. The criticism comes as unemployment has fallen to 7.1%, just shy of the 7% target for discussion to begin raising rates. Carney was happy to point out that despite the low rate, the figure was misleading and not a true reflection of unemployment conditions, with more people working part time and for less. The BOE moved their medium term unemployment rate to 6 to 6.5%.

This should have been positive news for anyone looking for confirmation that rates would not be rising in 2014 as many had begun to position for. Carney raised concerns about slack in the economy accounting for up to 1.5% in GDP and until this spare capacity has been realised, rates will remain low. All in all Carney downplayed the UK recovery, highlighting several areas of concern and wanting to assure business that rates would remain low. Markets appear to have little faith in the BOE at this stage and their upward revision of their GDP estimate for 2014 to 3.4% saw GBP rally across the board.

EURGBP dropped back towards annual lows below .8200, partly on the news flow from the UK and also on comments from ECB member Coeure that the ECB are seriously discussing the possibility of negative deposit rates in the region. This saw the single currency fall across the board. EURUSD dropped back towards 1.3550 before gradually recovering as the USD faced selling pressure. Part of the EUR recovery yesterday was based on several ECB members’ comments talking down the deflation risks in the region. German CPI came in line with expectations this morning supporting this but the single currency has failed to hold on to initial gains. The final bit of data from Europe comes from the ECB monthly report.

The USD has faced eight straight days of declines and with January sales data and today we may see continued declines into the weekend. There is no doubt that the USD has been holding a non farm payroll hangover for some of its declines, there was also the reversal of larger risk trends that saw EM markets recoup some of their recent losses. Weekly jobless claims and January retail sales headline the US calendar, no change is expected in the retail sales figure, however we would not be surprised to see this lower however given the recent weather effects on January data which may see the USD face one final bout of selling pressure.