Markets focused firmly on Carney inflation and monetary policy reports

Tom Tong07/Aug/2013Currency Updates

GBP

Mark Carney and the Bank of England rate setters will publish their views on the potential for a re-evaluation of the way the the Bank deals with the asset purchase policy and the changing of interest rates. George Osborne tasked the Monetary Policy Committee with producing this report in March and it will be one of the first times that the market can understand what Mark Carney believes to be the correct way to deal with the UK’s transition from recession to growth.

There is a general consensus that Carney will point towards implementation of a policy of forward guidance in which interest rates will be pegged to a measure of growth in the UK economy. Bernanke and the FED have been working on this rule by pegging US interest rates on levels of unemployment. Some analysts have pointed out, however, that with the PMI indices and other data points being released at such strong levels that the UK should attempt to taper down the emergency tactics earlier and push the economy to rely on intrinsic growth as opposed to external stimuli. This point of view was exacerbated yesterday with strong new car registrations as well as a strong upswing in Industrial Production rising by 1.2% in the past 12 months.

EUR

Yesterday saw the euro trade at a seven week high against the dollar following a report showing that German factory orders rebounded more than economists forecast in June. The data revealed that factory orders rose by 3.8% whereas the consensus forecasts had predicted a 1% gain. This data initiated an upward revision of the German economy from the IMF, which hiked its growth forecast for the euro zones central economy up to 1.4% in 2014 from a previous 1.3% forecast. It maintained its 2013 growth forecast at 0.3%.

Orders within the eurozone as a whole rose 10% last month, while sales outside of the bloc rose by just 0.9%.

This added to signs that the 17 nation region was recovering, and saw the euro rise against the majority of its 16 major counterparts. Further positive news for the region came from Italy, following a separate data release showed that the countries recession had eased in the second quarter. Italy’s economy contracted at 0.2% in the second quarter, half the expected 0.4% contraction, and an indication that the blocs third largest economy may be stabilising.

Today is a fairly quiet day in terms of data from the eurozone, with German Industrial Production the only release of any significance.

USD

Yesterday we saw the greenback lose ground against a basket of other currencies; the US dollar index closed 25 percentage points lower than it opened. Uncertainty about when the U.S.

Federal Reserve would begin rolling back its stimulus has kept dollar bulls at bay in recent days. On Monday, the US trade balance showed the deficit for June was only 34.2 billion USD, which was much lower than the 43.1 billion predicted figure. Additionally, May’s figure was revised up -44.1 billion USD from 45 billion USD. Investors pushed back expectations that the Fed will slow its bond-buying stimulus of 85 billion per month as early as September the Fed’s asset purchase programme is seen as negative for the US currency as its tantamount to printing money.

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Written by Tom Tong

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