Dovish Carney sends sterling into reverse, dropping 130 pips

Market Review

Another quiet session yesterday as there was a big lack of data to move the markets. The biggest came in the morning with the German ZEW Economic Sentiment missing the expectation by almost 10 points. This put the figure at its lowest level since December 2012 with the obvious negative influence being Germany exposure to the Ukraine Geo-political risk. However the ZEW institute did say that they do not see the German economy sliding back into recession as has been the case for Italy. Given that there has (potentially) bee positive developments on the Ukraine front in recent days we do not interpret this data as being genuinely negative for the German economic outlook in going into year end. The strategy entry for the EURUSD was obtained and came close to the first target, though unfortunately no cigar. The S&P strategy was stopped, and even though US10Y touched the entry it was not filled before the bond hit first target.

Today's Fundamental View

This morning has seen the release of UK data which has given us some much wanted volatility and movement in sterling related currency pairs as well as the quarterly inflation report and the press conference that followed. First off the data showed a slight lag in the wage ‘growth’ at -0.2%, which was the first decline since 2009. This led to some cable weakness and the 50% Fibonacci of the initial drop worked well as a short entry to take the trade down to the previous low. As the press conference started the GDP forecast was upgraded along with the employment outlook, which initially strengthened the currency. However, this was countered by the more important fact that the BoE halved their wage growth forecast for 2014. Carney then delivered a relatively dovish press conference which sent sterling into reverse with a subsequent drop of 130 pips off the high with the pair heading down towards the low of May with the possibility of breaching this handle. This afternoons most important piece of data is US Retail Sales for July due at 13.30 BST and strong data here should lead to a new low for the month for EURUSD. In terms of Crude Oil Inventories from the US Department of Energy we believe there will not be a massive deviation today due to the API released last night, but have a slight positive sign ahead of it and is for this reason bearish. We believe there is still some upside for equities, but will be more cautious on today’s entry. The US10Y should continue lower amid no escalation in the eastern European crisis. We urge traders to be picky with their entries today, as it is again likely to be low volume and ranges trading type conditions.

Alternative View

Monetary policy comments can adversely affect the markets. Please remain aware of all developments coming out of Ukraine, Russian and the Middle East and keep a conservative outlook with regards to risk. Over exposure in markets with such uncertainty is dangerous and should be avoided.