BOE cuts growth forecasts in the UK as risk remains off

Tom Tong17/Nov/2011Currency Updates

GBP

The Bank of England yesterday cut both its inflation and growth forecast prompting the markets to speculate that another dose of QE was on the horizon.

Economic growth was cut by 1% for 2011 and 2012 while inflation is set to fall in 2012, dropping further in 2013 and 2014. In the words of Mervin King ‘economic activity could be broadly flat until the middle of next year.’

Further bad news yesterday came in the form of UK unemployment and Nationwide consumer confidence.

Unemployment rose to 8.3%, a 15 year high, with youth unemployment above 1 million and consumer confidence showed a reading of 36 for October, lower than September and an all time low.

Today, we see the release of UK retail sales at 9:30am GMT, a decrease of 0.2% is expected for October any surprises would be certainly help the pound.

EURO

A report from Fitch yesterday stated that there was a risk of contagion from the European debt crisis this led to major U.S. equities, high yielding and risk related currencies to tumble.

Yesterday also saw France and Germany come to a stalemate over the involvement of the European Central Bank in solving the debt crisis. Angela Merkel stated that current EU agreements do not allow for an intervention from the ECB, while the French on the other hand expressed their support for the ECB to have a greater role in the crisis. The French are pushing for the ECB to print more money to bail out struggling European economies.

In other news, Banco Popolare di Milano ran into trouble yesterday with its share price falling by 13%, Greek PM Lucas Papademos won a large overall majority in government, giving him the support he needs to lead the government, and Portugal received the next the next tranche of their bailout fund.

In terms of data, yesterday saw the regions CPI increase by 3.0% and the core version of the report showed a 1.6% rise.

No major reports are out today, risk aversion and fears of contagion could see the Euro being sold off.

USD

Risk aversion reared its head yesterday and once again highlighted the USD safe have status.

The big news yesterday was credit rating agency Fitch stating that the Euro zone debt crisis could put US banks at risk. Although already known to investors this came as token reminder that if the Euro collapses the world will be in big trouble.

The impact of the debt crisis was evident as even a mixed bag of economic reports from the US did little to stop investors piling into the currency.

Consumer confidence prices declined by 0.1% in October, a flat recording was expected, if you exclude volatile items, core CPI came in as expected, 0.1% higher. In theory these figures should prompt the FED to provide more economic stimulus but it did not seem to put investors off from buying into the USD.

On a more positive note, the demand for US assets rose in September, the TIC Long Term Purchase report showed a figure of 68.6 billion USD in surplus in FX demands for assets. This was higher than the 58.8 billion reading in August and higher then the forecast of 63.4 billion.

The industrial production report for October also surprised the market, coming in at 0.7%, with a forecast of 0.4%.

Finally the NAHB housing market index posted a positive outlook for the housing market, coming in at 20, beating the 17 that was forecast for the index.

Today, we have a few important reports from the U.S. At 1:30pm GMT we have October’s building permits report, expected to come in at 600,000. Initial Jobless claims are expected at 396,000 also at 1:30pm GMT and the Philly Fed Manufacturing index is expected to post a reading of 8.7 at 3:00pm.

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Written by Tom Tong

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