Bank of England cuts outlook in gloomy inflation report

Claire Hogarth13/Nov/2014Currency Updates

GBP

Sterling plummeted by 0.75% on the dollar after a gloomy Bank of England inflation outlook was released yesterday. The central bank warmed that inflation could dip below 1% in the next six months, with the target of 2% unlikely to be reached for three years due to low food, energy and import prices. Prediction for UK economic growth was cut to 2.9%, while BoE Governor Carney expected average salaries to be growing by 2% by the end of 2015.

Yet, news out of the UK on Wednesday was dominated by the announcement that five banks had been collectively fined £2bn by UK and US regulators for their part in the forex scandal. The Financial Conduct Authority (FCA) dished out £1.1bn worth of fines to UK banks after they had been found guilty of fixing the daily reference rate between January 2008 and October 2013.

A string of further releases in the UK on Wednesday commenced with the ILO unemployment rate that disappointed at a lower than expected 6.0% for the three months ending September. This shows no change on last month but remains at its healthiest position since November 2008. The number of unemployed people in the UK did, however, decrease, with the Claimant Count down by 20,400. This weaker than hoped data was offset by a surprise increase in the average earnings as the National Statistics figure rose from 0.9% in August to 1.3% in September. Significantly, this marks the first time average pay has risen above inflation in the past five years (figure 1).

Figure 1: Average weekly earnings overtake inflation

figure 1-131114

EUR

A mixed session for the single currency yesterday as the currency rose by 0.4% on the pound but fell by 0.35% on greenback despite promising industrial output growth.

Industrial production increased by 0.6% month on month in September and by 0.6% year on year. The data, which measures the change in volume of industrial output, was 0.9% above expectations and well up on last month’s annualised figure to boost the euro as it strengthened against most of its major peers. Germany, however, continues to struggle as the country’s wholesale price index fell by 0.7%. Elsewhere, ECB President Mario Draghi labelled the current employment levels as “unacceptable” at a speech in Rome.

There is more meaningful data out in the Eurozone today with the release of the Consumer Price Indices for Germany, Italy and Spain, among others. At 9am the ECB will also be releasing its monthly report for November.

USD

The US Dollar index traded within a narrow band on Wednesday after limited significant economic releases during London trading, but was able to rise overall by 0.35%.

Mortgage applications fell in the US last week by 0.9% according to the Mortgage Bankers Association, although the volatile nature of this data caused muted market fluctuations. Wholesale inventories came in worse than expectations at 0.3%, although this was an improvement on last month and registered its lowest reading since August. Meanwhile, US regulator, the Commodity Futures trading Commission, handed out $1.4bn in penalties to UK and US banks as part of the forex scandal including US banking giant JP Morgan Chase.

The US will be hoping for some more promising employment data today with the release of jobless claims at 1:30pm London time and the US Bureau of Labor Statistics job openings data at 3pm.

Rest of the world

The yen advanced from its seven year low after Japanese official’s downplayed speculation of a dissolved parliament. The weak yen has had ramifications for South Korea as the won fell by 0.4% to its lowest point in almost a year amid concerns that yen’s decline to its lowest point in seven years will help Japanese exporters compete.

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Written by Claire Hogarth

Marketing Executive at Ebury. English Literature graduate from the University of York and a motivated professional.