Bank of England inflation report sinks pound, signals 'low rates for longer term'

Ebury, weekly currency outlook

The performance of G10 currencies showed some divergence last week. The euro stabilized against the dollar, supported by better-than-expected macroeconomic data.

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On the contrary, the pound and the yen they suffered big falls, the first currency for the inflation report that turned out to be more pessimistic than expected The second reason was simply the continued downward trend that began after the Bank of Japan's decision to implement further monetary easing measures. The Brazilian real followed the yen's decline, reaching its lowest level against the dollar since 2005.

 

 

 

GBP

The Bank of England's inflation report, containing the Monetary Policy Committee's (MPC) latest review of inflation forecasts, was the focus of attention last week. The report was more pessimistic than expected, forecasting inflation to return to 2% in 2017 and unemployment to fall slightly below current levels.

 

It appears clear that poor data from the eurozone (where growth is expected to reach 1,25% in 2015, according to the Bank of Spain) and falling inflation are leading the MPC to reconsider its view on when the next interest rate hike will occur. As expected, the pound fell against most currencies except the yen.

 

EUR

Economic data in the eurozone appear to be stabilizing, although they remain far from levels that could significantly reduce unemployment or improve the debt situation of peripheral countries. GDP growth in the third quarter was 0,6%, along with upward revisions to the figures for the other two quarters. Third-quarter growth was in line with our 2014 growth forecast of 0,7%. Data from the peripheral countries were mixed. While Spain, Greece, and Portugal posted growth rates of 2%, Italy appears unable to avoid another recession, and its economy contracted again, by 0,4%.

 

All things considered, the outlook is far from encouraging, although it may be slightly better than feared just a few weeks ago, when an economic contraction was a real possibility.

 

Finally, and as often happens when there is a large number of short positions and an excess of bearish consensus on the euro, the common currency turned around and appreciated by more than 1% against the dollar in the absence of macroeconomic news, which resulted in it ending the week stable against the American currency and higher against the pound.

 

USD

The positive outlook for domestic demand continued in the US, pointing to sustainable growth of 3% over the next few quarters. Retail sales rebounded in October after September's decline, rising 0,5% (September's figures showed a 0,2% drop). Finally, gasoline prices fell below the psychological level of $3 per gallon. Based on the October data, it appears increasingly likely that the Federal Reserve will raise interest rates in the spring of 2015.