Daily Market Report 16/05/2013

Sterling was boosted yesterday morning following comments made by Bank of England Governor Mervyn King that a recovery for the UK economy was now “in sight”.

In its quarterly inflation report, the BoE forecasted that the UK should grow by 0.5% in the second quarter, a 0.2% increase from the first three month. The Bank also predicted that the recovery will be “modest and sustained” as well as stating that inflation will remain high until at least the end of 2015. Sterling also received a boost as data from the National Statistics Board showed that the unemployment rate fell by 0.1% to 7.8% for the three months leading up to March.

However sterling’s gains, especially against the euro, still remain limited as a lot of the good news from the UK looks to be priced in already. Investors will remain cautious on the pound as they await the arrival of Mark Carney to take over the helm as BoE Governor and especially his thoughts on further monetary stimulus. Although current expectations are that he won’t look to expand the current quantitative easing package initially, there are some economists who expect Carney to increase QE later in the year, should growth remain moderately weak.

The euro came under pressure yesterday as GDP data confirmed that France has entered a triple dip recession, Germany grew less than expected and the euro zone as a whole contracted even further, thus confirming a prolonged recession in the single-bloc area.

The dominance of the US dollar continued yesterday despite data showing producer price inflation fell below expectations, along with industrial production and manufacturing in New York. Continuing fears over the euro zone seems to be sapping demand for riskier assets and thus the safe haven status of the US dollar seems to be attracting demand from investors.

Data today is set to show that inflation slowed in the euro zone to the lowest in three years for the month of April. If this comes into fruition then speculation could mount for additional rate cuts by the European Central Bank. The US will come under focus in the afternoon with inflation set to fall for the month of April.

More importantly, however, will be the US jobless claims figures for the week ending May 10th. Investors will be focusing on data from the job market to gauge what the Federal Reserve may do regarding their quantitative easing program. A lower reading should prompt the US dollar to strengthen further and push through support levels against the pound.

Key Announcements:

10.00am – EUR – Consumer Price Index (MoM) (Apr): Expected to fall to -0.1%.

13.30pm – USD – Consumer Price Index (YoY) (Apr): Expected to fall to 1%.

13.30pm – USD – Initial Jobless Claims (May 10): Expected to increase to 330,000.

15.00pm – USD – Philadelphia Fed Manufacturing Survey (May): Expected to improve to 2.4.

15.30pm – CAD – Bank of Canada Review.