Sterling slumps after dovish BoE Inflation Report

United States Dollar:

Sterling fell across the board yesterday with the release of the Bank of England’s quarterly Inflation Report. The report upgraded the forecast for 2014 UK GDP growth from 3.4% to 3.5%, and estimated that the amount of slack in the economy had narrowed to 1%. This was where the good news ended, however, as the bank forecast wage growth this year would be around 1.25%, half the May report’s estimate of 2.5%. With this sluggish wage growth being compounded by last month’s jump in Inflation, BoE Governor Mark Carney took the opportunity to play down speculation of a 2014 rate rise, saying an increase wasn’t warranted at present, and that even if the slack in the economy was used up overnight then the current 0.5% Bank Rate would be near the appropriate level. Cable fell from 1.68 on the news to 1.6725, and fell away throughout the rest of the London session to dip below 1.67 for the first time since April. With four MPC meetings left in 2014, the chances of 9-0 against a rate rise turning to 5-4 in favour seem slim given today’s reading, even if next Wednesdays minutes from the last meeting confirm 1 or 2 votes in favour. Later in the day we had some disappointing US Retail Sales figures, with the core reading showing 0.1% growth when 0.4% was expected, and the overall reading coming in flat when 0.2% was expected. Cable briefly rose on the news from 1.6705 to 1.6726, however these gains were quickly reversed as the markets continued to sell the pound throughout yesterday evening. GBP/USD currently sits at 1.6675. This afternoon sees the weekly Unemployment Claims release from America, with 307k forecast.

Euro:

This morning has seen disappointing GDP results from the eurozone’s two largest economies. First up, we had France’s preliminary Q2 reading, which mirrored Q1 coming in flat when a small 0.1% uptick was expected. Shortly afterwards, Germany’s preliminary Q2 reading printed -0.2%, slightly worse than the -0.1% eyed. With Italy entering a triple-dip recession last week, this means none of the three biggest eurozone economies have posted a positive figure for Q2. With a mild winter helping bring two quarters of better-than-expected growth, a slip was expected in Germany. Recently, however, the Ukrainian unrest has led to a collapse in German business confidence, which in turn has hit manufacturing and employment data. With low inflation persisting in the Eurozone, the downward pressure will remain on the shared currency, especially if today’s Eurozone GDP and Final CPI readings print worse than expected. EUR/USD briefly rose above 1.34 on the back of yesterday’s poor Retail Sales figures from America, however this gain was quickly reversed and we currently sit at 1.3362. GBP/EUR traded as high as 1.26 yesterday morning, though this has plummeted and we now trade at 1.2466. Aussie and Kiwi Dollars: New Zealand Retail Sales beat forecast slightly overnight, with both the core and overall reading showing 1.2% growth between Q1 and Q2. NZD/USD moved up from .8458 to .8484 on the news. We currently trade at .8488. Overnight also saw the Melbourne Institute’s monthly Inflation Expectations reading. This showed that it expects prices to rise 3.1% in the next 12 months, down from last month’s reading of 3.8%. AUD/USD has managed to break through .93 and currently trades at .9306. GBP/AUD is at 1.7910 and GBP/NZD sits at 1.9636.

Date Releases for the next 24 hours:

AUD: No data

EUR: Final CPI y/y; Flash GDP q/q

GBP: No data

NZD: No data

USD: Unemployment Claims