IFX Market Report - 12 November 2009

Submitted by qrops on Thu, 12/Nov/2009

Sterling down on King’s dovish tones

 
The Bank of England Inflation Report showed that if Bank Rate moves in line with market interest rates (starts rising in Q3 2010 and reaches 1.6% by end 2010 and 3.2% by end 2011) and the Quantitative Easing (QE) programme stays at £200bn, “the risks of inflation being above or below target are broadly balanced by the end of the forecast period”.
 
This shouldn't have been much news for the market but there is some ambiguity because CPI is below inflation at the two-year horizon and slightly above at the three-year horizon. The MPC's mandate is 2% inflation in the medium term, which is defined as two to three years.
 
The Governor in his opening statement placed more evidence on the downside risks in the near term and generally downplayed the pickup in growth. So it seems that he continues to be more dovish than the average Committee member. The different views within the MPC will be revealed when the minutes are released next Wednesday.
 
Meanwhile, the labour market data was more benign with a smaller number of jobs lost than expected. Claimant count unemployment rose 12.9k (consensus 20k) and the unemployment rate stayed at 7.8% after a downward revision last month. This suggests that workers are cutting hours and pay in order to stay in their jobs, while for many UK companies demand has been more resilient in recent months.
 
On the FX markets, King’s dovish comments were sufficient to weaken Sterling with GBP/USD down roughly 2.0 cents to $1.6550 and GBP/EUR falling 1.0 cent to €1.1035. Today’s major economic releases include ECM monthly report (Nov) at 09:00 GMT, EMU industrial production (Sep) at 10:00 GMT and US initial jobless claims (wk 7 Nov) at 13:30 GMT.
 
http://www.internationalfx.com/