Dear Subscriber, Please find below today's update which gives you an insight into the current market conditions, enabling you to keep informed and up to date on the latest currency movements. Headlines • BoE announces 7% Unemployment target - for ultra-low 0.5% interest rate.
• Carney raises GDP forecasts - Sterling rallies on BoE "K.Os".
• GBP/EUR up 100 pips - German Industrial Production at 2-yr high.
• GBP/USD hits 1.5-month high - GBP/CAD up over 2 cents.
Sterling Bank of England Governor Mark Carney shocked markets yesterday by asserting that the current record-low interest rate will remain in place until the Unemployment Rate falls below 7.0%. However, the Canadian Central Banker said that there are three "Knockouts" that carry the potential to knock the BoE's forward guidance off-course, they are as follows: if inflation remains above 2.5% in 18-24 months; if medium term inflation prospects appear to be out of sync with the Bank's 2.0% target rate; and if there are risks to financial stability that cannot be contained using other monetary policy tools.
The Pound initially declined when the forward guidance was announced, but as markets digested the implications of the "Knockouts" Sterling came back into demand. It seems that investors interpreted the caveats to mean that the BoE still has the flexibility to raise rates if it deems necessary; essentially the primary focus has been moved from inflation to other economic indicators and this was seen as bullish for the Pound due to the recent upswing in domestic data.
Whilst the headline 7% Unemployment statement - meaning that the UK economy will have to add a further 750,000 jobs before interest rates are hiked - reads like a dovish remit, the fact that CPI inflation has consistently remained above target for the last few years means that some traders took the announcement to be a disguised nod towards an exit strategy. The Pound was also boosted by the BoE's decision to raise GDP forecasts for 2013 from 1.2% to 1.5% and for 2014 from 1.9% to 2.7%. It is also important to note that many market-players were expectant of a lower Unemployment threshold; something more inline with the 6.5% level that is targeted by the Federal Reserve in the US. In light of the day's developments overnight index swaps predict a 90% chance that interest rates will be raised during the next three years.
Euro The Pound to Euro exchange rate advanced by around a cent yesterday as markets anticipated a slightly earlier hiking of interest rates in Britain, despite the BoE announcing a set of forward guidance measures designed to give businesses the confidence that rates will remain low for a prolonged period of time.
In the Eurozone the continent's most industrial nation got back on track with a potent print from the Ministry of Economics. The German Industrial Output report for June showed that orders accelerated by 2.4% - the fastest rate of expansion for two years. Although recent data out of the 17-nation bloc has markedly improved upon figures from the beginning of the year, it is still a long way behind the potent readings emanating from the British Isles; it appears that GBP/EUR has potential for further upward surges.
US Dollar Sterling strengthened by over 1.5 cents against the US Dollar yesterday on the back of the Bank of England's "Knockout"-ridden forward guidance statement. GBP/USD soared through resistance levels to touch a 1.5-month high as a mix of: conditional 'Knockouts", a higher-than-expected Unemployment threshold, and a series of upward revisions to the UK GDP forecast were interpreted as positive for the Pound. The Sterling / US Dollar rate could conceivably appreciate by another cent if the Pound can mount a successful rally above technical resistance at 1.5500.
Canadian Dollar The Pound pummelled the Canadian Dollar yesterday, rallying by over 2.7 cents to a monthly high as traders re-evaluated their UK interest rate projections. The 'Loonie' was also negatively impacted by two pieces of drastically soft domestic data. Canadian Building Permits declined by an unexpectedly high -10.3% and the Canadian Ivey Purchasing Managers Index disappointed expectations of 57.0, coming in at an 8-month low score of 48.4. In light of the massively weaker-than-anticipated prints investors lost confidence in the Canadian Dollar.
Australian Dollar Sterling struck a fresh near-3-year high against the Australian Dollar yesterday in the wake of the BoE monetary policy announcement. In terms of Australian data, it was reported that the AiG Performance of Construction lagged at 44.1 in July, however, the housing market performed better with Home Loans advancing by a stronger-than-expected 2.7%.
New Zealand Dollar The New Zealand Dollar was the most resilient currency against the Pound yesterday as fears surrounding the contamination of the nation's dairy products receded, which gave the 'Kiwi' Dollar the impetus to rally back from GBP/NZD's strong gains at the beginning of the week. If you need any further assistance, or require a live dealing quote - please do not hesitate to contact me on 01736 335250 or send an email to info@torfx.com Regards,
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