Mark Carney sends Sterling higher with hawkish inflation report

Enrique Díaz-Álvarez13/Feb/2015Currency Updates

GBP

Sterling soared after the Bank of England’s inflation report, climbing by 0.9% on the Dollar and 0.3% on the single currency.

A relatively hawkish Bank of England quarterly inflation report from Governor Mark Carney was greeted with strong gains for Sterling. Low inflation, which the central bank predicts will turn negative in the spring for the first time in more than half a century, could cause the interest rate to be cut if downside CPI risks were to materialise. However, the next “likely” move would be an increase, which could be sooner than markets expect if lower oil prices were to provide a greater than expected boost to global and domestic growth. Carney’s tone on the health of the UK economy was bullish, with consumer spending and robust investment growth all cited as signs of UK strength. Growth forecasts were revised upwards to their strongest in several years at 2.9%, while wages are expected to grow by as much as 3.5% this year, having risen just 1.75% in 2014. Inflation will be pushed to zero in the second and third quarters, although Carney stated the 2% target will be reached in the medium term.

The Conference Board’s Leading Economic index at 10am the only data of note out in the UK today.

EUR

A day of mixed fortunes for the Euro, with the single currency finishing London trading 0.3% down on Sterling and 0.5% up on the Dollar. Discussions between Greek and Eurogroup finance ministers regarding Greece’s debt situation have reached a stalemate in Brussels. While talks were deemed “constructive” by Eurogroup President Jeroen Dijsselbloem, a joint conclusion failed to be met. This is unsurprising given the contrasting viewpoints of the two parties involved. Further talks will commence on Monday.

Prices in Germany fell greater than had been previously reported in January. Revised figures released yesterday showed inflation in Germany dipped into negative territory in January for the first time in five years at -0.4%, slightly greater than the -0.3% that was estimated a fortnight ago. On a monthly basis, prices declined by 1.1%. Industrial production in the Eurozone stalled further in December, falling by 0.2% year on year having remained static in the final month of the year.

Today will be another significant day of data in the Eurozone. Both Germany and the Euro-area will announce their growth data for Q4 at 7am and 10am GMT respectively.

USD

Weak retail sales and a strong day’s trading for the Pound saw the US Dollar fall by 0.6% against its peers.

Consumer spending in the US barely rose in the first month of the year according to the US Census Bureau. Despite cheap gasoline prices and a buoyant labour market, overall retail sales slipped by 0.8% in January, a second consecutive month of declines. Retail sales excluding autos also experienced another month of negative growth, falling by 0.9% on an annualised basis. Business inventories edged up in December by 0.1% although initial jobless claims spiked back above 300,000. The more representative four week average did, however, fall by 3,250 and remains in a historically strong position. Continuing jobless claims surprised on the upside, down by 51,000 to 2.354 million.

A limited set of data out in the US on Friday. Import and export price indices are followed by Reuters’ consumer sentiment in early afternoon.

Rest of the world

In a mostly unexpected move, the Swedish Riksbank followed suit of its Danish and Swiss counterparts by cutting its benchmark interest rate into negative for the first time in its history from zero to -0.1%. Citing stubborn deflation and uncertainty abroad, the central bank will also begin purchasing government bonds to the total sum of SEK 10 billion. The dovish tone of the statement opens the door to further cuts in March and April.

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Written by Enrique Díaz-Álvarez

Chief Risk Officer at Ebury. Committed to mitigating FX risk through tailored strategies, detailed market insight, and FXFC forecasting for Bloomberg.