Mark Carney ties interest rate policy to labour market, though sterling remains bullish

Tom Tong08/Aug/2013Currency Updates

GBP

Yesterday was a strong day for the pound. The much hyped and anticipated MPC inflation report did not disappoint. The move of the BOE in many ways mirrored Bernanake and the FED. Carney disregarded tradition with a continuation of concise forward guidance, with the intention that through increased communication, confidence will increase and elements of stability will return to the economy. Essentially Carney has promised that interest rates will stay at the emergency level of 0.5% until unemployment falls to 7.0%, and present the figure is 7.8% Interest rate hikes and reductions to QE will also be waiting for unemployment to fall. This will leave consumers looking to borrow delighted, and those saving devastated as the miserable gains on savings accounts will continue.

The Governor did, however, stress a bearish view highlighting that, although we have seen strong data recently, the economy still has a long way to go. Recent positive data releases include UK service firms, which enjoyed record growth and account for 3/4 of total economy output. Furthermore, manufacturing enjoyed growth of 1.9%. Following an upturn in the UK economy, the Bank now expects GDP to expand by about 1.4% this year and 2.4% next year-up from earlier estimates of 1.2% and 1.7% respectively. Ultimately the new policy has varied intentions, with Carney stating “this is about making stimulus more effective. Second is reassurance. Third is to test how much excess supply there is in economy”.

Sterling immediately fell nearly a cent against the greenback and hit it’s session low following the announcement. The pound also lost ground against the Euro. However the pound later rallied, with general market sentiment bullish towards the UK economy and sterling’s long term prospects for growth. Overnight trading has seen sterling continue to rally and will open strongly in London today at its highest rate since mid-June.

There are no data releases for sterling today, watch where we are trading at to see how the market reaction to yesterdays ruling continues to play out.

USD

We saw a lot of pressure on USD yesterday, particularly against sterling which saw GBP rise to its highest levels in over a month as Bank of England Governor Mark Carney released a neutral statement on the UK economy. However this was mostly down to GBP strength.

Two Federal Reserve officials said the US central bank might start slowing asset purchases as early as next month, suggesting last week’s sluggish payrolls data were not sufficiently weak for them to take such a move off the table.

Charles Evans, one of the more dovish officials at the Federal Reserve, said he would “clearly not” rule out the tapering of bond buying at the next meeting of US monetary policy makers on September 17-18.

Data remains strong in the US, with the US trade deficit plummeting in June to its lowest since October 2009 as exports rose to an all-time high while imports fell, cheering the Obama administration and pointing to much stronger second-quarter economic growth.

Over all the dollar remains the second best performer this year with a 4.3% increase, trailing only to the euro’s 5.6% gain.

EUR

Yesterday saw two of the eurozone’s largest economies, Germany and France, contribute to a meek uplift in the single currency union with the emergence of positive economic data.

With an increase of 2.4% in comparison with that of May, German industrial output saw its swiftest escalation in almost two years in June. Germany has also seen an increase in factory orders of 3.8%, the highest increase in 8 months.

Data out of France for the month of June confirms a 200m euro increase in exports. Though conversely, a decrease in imports of 1.07bn Euros was noted. The Bank of France anticipates a reduction in growth in the Third Quarter, with data from the bank’s monthly business survey indicating the economy is expected to increase by 0.1%, a marginal fall from the forecast 0.2% for the second quarter.

Though Italy’s economy showed contraction that was less than expected, GDP for the second quarter showed a reduction of 0.2% for the month and 2% for the year – both figures surpassing analysts’ expectations.

This places the French deficit at 4.44bn Euros, a reduction of 1.27bn since May.

Today we will see the publication of the ECB’s new monthly economic review.

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Written by Tom Tong

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