Foreign Exchange News
14 August 2013

Pound gains Strength as Markets Challenge BOE expectations

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EUR/USD 1.3265
GBP/USD 1.5451
GBP/EUR 1.1671 (0.8581)
EUR/CHF 1.2417
GBP/CHF 1.4493
GBP/AUD 1.7005

Yesterday was an active day in the markets despite the summer trading season. Several eye catching economic releases were sure to bring some volatility to markets and we were not disappointed. Over all the EUR was weaker on the day whilst the pound saw breakouts on several pairs, although rumours have circulated that an erroneous trade caused the sudden spike in demand for GBP. The USD continued its advance as it pairs last week’s losses.

UK inflation data was first on the docket, as we mentioned yesterday the caveat for continued forward guidance from the MPC relies on inflation falling back in line towards its 2% target. The inflation figure came in as expected posting 2.8%, down from 2.9% the previous month. Falling inflation should serve to ease the squeeze on real earnings and it is expected that inflation will continue to fall back towards 2% for year end.

The major target for the MPC’s forward guidance policy is a 7% unemployment target which brings us to today’s releases. Along with the minutes of this month’s MPC meeting, we also have employment figures on the economic docket. There is no material change expected to the unemployment rate this month and is set to remain at 7.8%. The BOE minutes are likely to be much of a non event, we’d expect Carney got a unanimous vote to proceed with forward guidance but what will be interesting will be the discussion surrounding the inflation based knock out.

We know the BOE have stated that their 2016 rate increase target may well be adjusted should inflation remain above 2.5% in 18 months time. As it stands markets are pricing in a rate increase in the second half of next year, a lot earlier then the BOE’s expected target time frame. The inflation caveat has been part of the rationale for GBP’s recent strength, if the minutes show members were looking for a higher inflation threshold we may see a GBP sell off.

Data from Germany continues to show signs of improvements with yesterday’s ZEW business sentiment beating expectations, although the .7% rise in Eurozone industrial production still fell short of the 1% expected, it still points to signs of the Eurozone emerging from recession. The rise in industrial production was the 5th in seven months and will be adding value to GDP figures. The rise of the core was further confirmed with German GDP figures this morning posting a rise of .7% versus .6% expected. French GDP also beat expectations.

The Eurozone composite figure is due at 10am and whilst the core will no doubt boost the figure there has been strong evidence of economic disparity through the Eurozone. The EUR is slightly higher this morning following these releases but the price action has been relatively muted suggesting strong core figures have been priced in.

In the US headline retail sales figures were worse than expected but the underlying data is very supportive of a stronger economy and saw increased expectations of a September taper. The USD continued its advance and paired last week’s losses.

EURGBP broke back below the key .8580/75 area yesterday but there have been suggestion this was an incorrect trade entry, otherwise known as a “fat finger”. Technical support was broken yesterday but the lack of follow through and retrace back above .8575 suggests we will need to see another break lower to confirm this move. Resistance to the top remains at .8600 and .8625.

EURUSD and GBPUSD were both under pressure as USD demand early in the day drove them lower. Both have been in a down trend since August 8th and are off their respective highs of 1.3400 and 1.5585 respectively. The EUR has been fairly muted this morning despite strong GDP figures and its failure to rally higher suggests there is a lack in demand for the single currency. Resistance in EURUSD is at 1.3275 and 1.3325 above that.

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