Pound dampened by BOE pessimistic outlook

November 13, 2014

The Sterling fell to the 1.58 integer level again as the Bank of England cut its economic prospects with forecasts for the inflation rate to possibly decline to levels below 1%. The main reason for cutting forecasts comes from the weaker outlook of the global economy especially the Eurozone which may dampen UK’s exports and affect domestic demands. The geopolitical uncertainty and falling commodity prices may also drag down the price level.

Before the Inflation Report, the Pound/Dollar once rose to 1.5940 buoyed by unemployment rates staying at a six-year low last month and wages growing by 1% year on year. This was higher than the expected growth of 0.8%. However, the market soon adjusted its expectation in line with the BOE. General consensus shows a belief that the first rate hike will be further delayed.

The Aussie Yen rose to 100.60 and stabilized beyond the 100 level for the first time since May 2013. The pair is supported by a new round of carry traders as the Yen depreciates. It may be heading to 104.50, where the line is drawn between the tops of 2007 and 2013.

The Kiwi/Dollar rose for the second trading day as the milk industry leader Fonterra reassured its former forecasts of milk payments and dividends for 2015. The New Zealand Dollar rebounded again from a bottom of 0.77 and seems to have broken the downward line since July 2014. The upper resistance will be at 0.80, if broken a double bottom pattern will form. I personally don’t see this scenario playing out, but bears should be cautious. A breakout of trendline is never a good sign.

The Asian stock markets diverged on Wednesday. The Nikkei Stock Average gained 0.43% to 17197. The Shanghai Composite surged 1% to 2494. ASX 200 slid 0.98% to 5463. In European stock markets, the UK FTSE was down 0.33%, the German DAX slumped 1.71% and the French CAC Index lost 1.39%. The US market changed slightly. The S&P 500 lost 0.07% to 2038. The Dow closed flat at 17610, while the Nasdaq Composite Index gained 0.31% to 4675.

On the data front, Australian MI Inflation Expectations will be at 11:00 AEDST. China’s segregated data of GDP will be released at 16:30 AEDST and US Unemployment Claims will be at 0:30 in midnight.

Have a great trading day!

Anthony

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