Low inflation levels becoming a global theme

The major market movement on Tuesday occurred in the GBPUSD, which fell by over 100 pips to a new 2014 low (1.5896) following a disappointing inflation reading for September. Annualised inflation for September was announced at 1.2%, below the 1.4% forecasts and a substantial distance away from the Bank of England’s (BoE) threshold 2% target to consider raising interest rates.

Since the inflation data has been released, the markets have already begun to speculate that a rate hike from the BoE will now be delayed far into 2015. However, this speculation is premature. I have remained in agreement that a BoE rate hike has been off the table this year for some time, with yesterday’s inflation reading making that official. Even beforehand, that always seemed to be the case because so far, only two members of the Monetary Policy Committee (MPC) had even voted for a rate increase. In regards to the BoE, Governor Carney has strongly indicated a BoE rate hike in spring 2015 can be expected and I feel it will take a continuation of weaker than expected inflation reports alongside other economic data, before we can discuss the BoE delaying rate hikes.

What is becoming more apparent here is that low inflation levels are becoming more of a global theme. For some time, we have been aware of the problems that low inflation levels have caused Japan, USA and more recently the EU, but UK CPI unexpectedly falling to a fresh five-year low indicates that we are encountering low inflation levels globally right now. Even overnight, further questions were asked about possible evidence of an economic slowdown in China, following China’s own CPI easing to a near five-year low in September. In reality, although it would be simple to attribute these low inflation readings to an oversupply of oil or maybe even lower energy levels, what we could be noticing is less confidence in the global economic recovery – the IMF only downgraded global economic forecasts last week after all.

Referring back to the currency markets and the possible direction the Cable could be heading in on Wednesday, UK Jobless Claims are announced later this morning. The consistently improving UK employment sector has been one of the shining lights of the impressive UK economic recovery and it is strongly expected that at least another 30,000 less jobless claims will be declared in a few hours. Although this would be positive news, investors are going to be paying more attention to the Average Wage Growth statistics.

In recent months, the BoE have expressed that Average Wage Growth is going to be playing a more influential role in determining when the BoE raises rates. If the data improves, a recovery of Tuesday’s losses is possible with potential GBPUSD resistance located at 1.5953 and 1.6008. The downside risk is that Average Wage Growth may fail to improve and as a result of this, I would expect GBP investor appetite to be weakened and subsequently – downside movement in the Cable. GBPUSD support can be found at 1.5850 and 1.58. If we reach the low 1.58’s anytime soon, this would represent an unexpected retracement of all the gains the GBP had recorded against the USD in the last year.

Already in the early hours of Wednesday, Germany’s CPI for September has been confirmed at 0.8%. Eurodollar volatility was muted following this release, largely due to data being in accordance with previous preliminary forecasts. Staying on the topic of Germany, more alarm bells were ringing for the German economy on Tuesday following Germany’s ZEW Survey for October plunging to a -3.6. This abysmal result has only added further fuel to the fire that Germany is on the brink of entering another recession and makes the summer slowdown look like a small sneeze in comparison to the past few week’s frustrations.

Over the past week, the Eurodollar has entered some sort of consolidation phase. With the exception of the more dovish than expected FOMC Minutes release encouraging Greenback profit taking, US economic data has been low in volume since the Non-Farm Payroll release. Later this afternoon, Advance Retail Sales are released from the United States and Dollar bulls will be hoping that the improved US labor data will result in increased consumer expenditure data later today – keeping hopes alive for a robust Q3 GDP figure.

European Central Bank (ECB) President, Mario Draghi is also scheduled to speak in Frankfurt later on Wednesday. Draghi is likely weary regarding signs of the Eurodollar bear run correcting / pausing in the past fortnight and may attempt to talk down the Euro. I continue to remember Draghi expressing in August that “the fundamentals for a weaker exchange rate are better now” and there is no more efficient way to ensure a weak current exchange rate than for your largest economy, Germany to be possibly entering a recession.