As anticipated over the two previous days; Bank of England governor Mervyn King in yesterdays quarterly inflation report warned that growth in the UK will be weak with the economy set to face “big challenges”.
The key points from the report were that the BoE lowered their forecast for annual growth from 2% to 1.7% as well commenting that they expect inflation to remain above the 2% target until after 2016, 3 years longer than expected despite weak growth. When questioned about monetary stimulus, Mervyn King replied that further stimulus would be explored, if necessary. The overall bearish tone from the Bank of England drove the pound lower against many of its peers, with notable drops of over 1% intraday against the euro and the US dollar.
Data released from the both the euro zone and the US came in positive with industrial production in the euro zone rising to 0.7% and retail sales from the US rising by 0.1%.
However investors looked beyond the solid economic data and focused on the G20 summit due to open in Moscow and Friday. At the summit, G20 officials will be addressing the issue of the “currency wars” (the weakening of currencies via government intervention) as well as monetary policy. The uncertainty over the details of the discussions caused investors to seek refuge in to the safety of the US dollar, causing it to gain against the majority of its peers.
GDP data released this morning has showed that France, Germany, Italian have all contracted in the fourth quarter of 2012 making the euro slightly weaker this morning. With no data due for the release from the UK today, market participants will be looking to the 5 year gilt sale this morning for a gauge of investor confidence. As stated above, with investors set to be cautious ahead of the outcome of the G20 summit tomorrow, we expect the US dollar to be slightly stronger over the next two sessions.
10.00am – EUR – Portugal GDP: Expected to rise to -2.9%.
10.00am – EUR – Euro Zone GDP: Expected to contract further to -0.4%.
10.00am – EUR – Greek Unemployment Rate: 26.8% in October.
13.30pm – USD – Initial Jobless Claims: Expected to reduce to 360,000.