Quarterly Inflation Report and jobs numbers key for rest of sterling's year

• Carney speaks at 10.30, UK jobs report comes out at 09.30

• Chinese data disappoints as Japanese GDP crashes in Q2

• Hints around improving jobs market and less slack will be sterling positive

• US retail sales key for onward progression of USD.

The Bank of England's Quarterly Inflation Report is due this morning, 30 minutes after the publication of the latest UK jobs report. Both have the potential to give sterling a hit one way or the other but we believe that the market is leaning to the high side.

As noted in Monday’s “Quarterly Inflation Report Preview” the past six inflation reports have been largely positive, bringing about increases in growth expectations and slashes to the unemployment rate that still have not been able to keep up with the recovery that has been created in the UK’s jobs market.

The question of slack is a difficult one to answer because its measurement is so up for discussion. The Bank of England uses a calculation based on the difference in the current participation rate and the Bank’s estimate of a longer-term average alongside similar measures of hours worked and overall employment. In the past few months, these measurements have started to contract quickly, indicating that the level of slack in the economy is coming lower. The jobless rate is now 6.5% from 6.9% while hours worked have recovered to levels not seen since the advent of the Global Financial Crisis, and the participation rate currently sits above the longer-term average. It naturally stands that the Monetary Policy Committee will have lowered its estimates of slack in this report; how correct it will be is anyone’s guess.

The arguments in favour of a tightening of monetary policy are therefore getting stronger every week and today's inflation report has the opportunity to set up the UK economy for a rate rise before the end of the year. Should we see that slack figure halved, then the obvious side effect that the Bank will be looking for is higher wage settlements. This month's inflation report only includes wage and inflation up to May and we have seen real wages deteriorate since then. Today's labour market report will confirm whether this trend has started to sway to the positive. Traders are looking for unemployment to fall to 6.4% from 6.5% last month and for an 0.1% decline in average weekly earnings, at 09.30.

Euro was hit hard yesterday following a pretty horrific reading of German investor confidence this morning. The ZEW index, a barometer of investor sentiment in the German economy and the prospects for it, tumbled in July. The reading of the present situation fell to 44.3 from 61.8 in June against a 54.0 expectation while the expectations component collapsed to 8.6 – the lowest level since December 2012.

The index has been falling consistently since the beginning of the year, coinciding with the beginnings of the Ukrainian crisis, and this is what is being blamed heavily for today’s nadir alongside fears of further trade barriers put in place by German/EU sanctions Expectations around Q2 growth in Germany have sunk heavily throughout the quarter and we will be looking for a negative GDP QOQ announcement on Thursday. Some people are expecting a figure as poor as -0.5% from April through July; a figure that would be the lowest since Q4 2012.

Chinese data overnight once again seems to have been lost in the fug of geopolitical pressures. Both industrial production and retail sales reports disappointed overnight, rising by 9% and 12.2% respectively. Chinese data has shown some signs of solidity but last week's trade figures showed a substantial lack of domestic demand and that remains the key issue. We expect to see Chinese authorities extend their stimulus in Q4 in order to attain their mandated growth targets.

Japanese GDP shrank 6.8% on annualised basis in Q2 according to figures released overnight. This is the largest amount since the Tohuku earthquake of 2011 and was driven largely by the government’s decision to raise sales taxes in April. Household consumption fell by 4.5% on the quarter and investment was down 2%. For all these slashes lower, the overall picture was better than consensus and JPY has remained robust. We believe that any bounce back from this quarter will be more protracted and painful than the government realises and will need additional stimulus and structural amendments before year end.

US retail sales is the most important US figure today and we will be looking to see just how much it can increase expectations around a knockout revision to Q2 GDP. The original GDP estimate of 4.0% handily beat expectations and the data since the announcement has strengthened the case for yet stronger performance in Q2. Last week’s run of trade data that showed a 7% slash lower in the deficit will be positive for growth with some Wall St analysts calling for revisions as high as 4.9% annualised. Factory orders in the US were also better than expected, rising by 1.1%.

Have a great day.