BoE removes the ‘super’ from ‘Super Thursday’
The first UK data out of the docket yesterday was mixed as industrial production produced a slight 0.1% monthly increase while manufacturing output declined slightly. The trade deficit was wider forecast but Sterling was supported as investors bought Pounds to close short positions.
As expected, the Bank of England left interest rates at 0.50% after a 7-2 vote. The latest inflation report revealed a downgrade of inflation and growth forecasts. The “dovish” commentary that the Bank of England expected the growth slowdown to be temporary meant the committee majority favoured waiting to assess the situation as they saw little risk in delaying a move.
Sterling weakened sharply as the market perceived the assessment to be insufficiently optimistic. Futures markets priced out the chances of a rate hike this year and Sterling sentiment soured. Governor Mark Carney’s press conference was peppered with questions about inconsistent forward guidance from the Bank. The Pound gained limited relief after Carney added that he expected a rate hike within the next year. Sterling mustered a push back above 1.3500 against the Dollar and the Euro held the Pound below 1.1360.
The Dollar lost ground as the Euro pushed back above 1.1900 and, after a limited reversal, the single currency edged higher again as the US currency lost momentum. The Euro held above 1.1900 on Friday as the Dollar failed to regain traction. The pair built on its recovery move from multi-month lows and surged through the 1.1900 handle, back closer to weekly tops, after the latest US consumer inflation figures came in weaker than expected.
The data dampened market concerns surrounding increased inflation pressures within the economy. It also eased concerns that the Federal Reserve (Fed) would have to tighten policy more aggressively as there were doubts whether there would be more than two further hikes this year. There were, however, still very strong expectations that there would be a further hike in rates at the June Fed meeting and the New York Federal Reserve inflation gauge continued to move higher for April.
The headline CPI grew 0.2% month-on-month in April and core inflation, which excludes volatile food and energy prices, came in to show a rise of 0.1%. Softer data dampened prospects for a steeper Fed monetary policy tightening cycle, as evidenced by a sharp retracement in the US Treasury bond yields, and this gave traders a reason to lighten their Dollar long positions.
Attention was focussed on the inflation data with the headline CPI increase of 0.1% slightly below consensus forecasts of 0.3%, although the year-on-year rate met market expectations at 2.5%. The 0.1% increase in core prices was also slightly below expectations with the year-on-year increase held to 2.2% from 2.1%.
The European Central Bank (ECB) Economic Bulletin appeared largely a cut-and-paste affair of the ECB’s opening statement from its April policy meeting. The report largely dismisses the bugbear of slowing growth which has started to taint the outlook for the Eurozone, saying it sees little impact in the medium-term – just as the ECB policy statement did. Growth in the region is expected to continue its steady rise, with the main threat coming from global factors such as increasing trade protectionism or falling global growth, as opposed to domestic factors, according to the report.
A longer-term view of Sterling that suggests downside against the Euro and the short-term view has certainly gone against those hoping for a stronger Pound. The GPBEUR exchange rate recently traded up to an eleven-month high of 1.159 but soon reverted to its previous trading range, which sees resistance at around 1.15
Data to Watch:
13:30 CAD Unemployment Rate (Apr)
13:30 CAD Net Change in Employment (Apr)
14:15 EUR ECB President Draghi’s Speech