Daily Market Report 08/08/2013

To say that the pounds movements yesterday were volatile would be a huge understatement following the Bank of England’s use of ‘Forward Guidance’ on monetary policy.

BoE Governor Mark Carney announced yesterday morning that the central bank will keep interest rates at 0.5% and will remain accommodative on quantitative easing until the unemployment rate for the UK falls to 7%.

The pound immediately dropped across the board following the statement as investors feared the worst for the pound. However, their mood on the pound soon changed as Carney’s press conference continued. When questioned, Carney confirmed that the unemployment rate at 7% was not a target but a threshold for the BoE to tighten monetary policy as well as confirming clauses that would void the BoE’s commitment to forward guidance.

Should policy makers at the BoE decide is likely to breach 2.5 percent, price expectations are no longer well-anchored or if financial stability is at risk then the BoE may indeed raise interest rates before the unemployment rate falls towards 7%. It is from these clauses that investors seem to be taking the view that there is a lack of credibility on the new guidance by the BoE and thus there seems to be a belief that a rate hike could come sooner should concerns over inflation be too much to bear for the BoE.

With concerns over Carney’s plans on forward guidance seemingly alleviated and given the recent impressive manufacturing, industrial, construction and service sector figures from the UK; investors drove up the pound across the board, with the currency finishing approximately 1% higher against the US dollar and 0.4% against the euro.

The next key event for the UK will be next Wednesday’s BoE minutes, where we will see how many members voted for the new measures to be put in place. If there is a lack of unanimity in the MPC, then the credibility of Mark Carney’s could well be put under question.

In other news German industrial production rose to 2% in June following a fall in May of 1.2%. In the US, President of the Chicago Federal Reserve Bank, Charles Evans, reiterated comments made on Tuesday by Dennis Lockhart of the Atlanta Federal Reserve Bank, stating that he could not rule tapering of the Fed’s monetary stimulus measure in the September Fed meeting.

Overnight, data from China showed the exports rose by 5.1% in July, easing concerns of a slowdown in the world’s second largest economy. As a result we have seen the Australian dollar claw back some its recent losses across the board. The Bank of Japan also took the decision to leave monetary policy unchanged this month citing that the economy was starting to recover.

Key Announcements:

9.00am – EUR – ECB Monthly Report.

13.30pm – USD – Initial Jobless Claims (Aug 3): Expected to increase to 336,000