Forward guidance the watchword for today.
01:00, 07 August 2013
· By Sales Trading
It seems incredible to think that only a few months ago the UK was looking at the prospect of a "triple dip" recession, and now here we are almost half way through the third quarter of 2013 and we've seen an absolute barrage of standout economic data in the past few weeks.
Despite this the pound remains resolutely unmoved despite some of the best economic data seen in recent years, and for this we can blame market expectations around today's eagerly awaited Bank of England inflation report, which is expected to be negative for the pound, even allowing for the fact that we are likely to see the Bank upgrade its growth forecasts and downgrade its inflation projections.
It is widely anticipated that new governor Mark Carney will look to pledge to keep interest rates low for a set period of time, in a form of monetary forward guidance, and he could even set a monetary threshold, like the unemployment rate as a benchmark, or a growth target, for when we can expect them to go higher again. The problem is that given the recent improvement in economic data, questions are now being raised as to whether we need forward guidance at all, as it could be counterproductive.
Yesterday we learned that all parts of the manufacturing sector of the UK economy expanded in June, the first time this has happened since 1992, while in the last week we've seen standout figures in the form of PMI data from the manufacturing, construction and services sectors of the UK economy.
UK car sales look set to post their best year since 2007, while BRC retail sales for July posted their best performance since 2006. Even house prices are now starting to push higher more rapidly than originally expected.
It also looks increasingly likely that the 0.6% Q2 GDP number could get revised higher, while Q3 looks set to post an even better growth number than Q2. In normal circumstances this sort of economic performance would usually suggest some form of policy normalisation, and not a pledge to keep rates anchored.
Six months ago this quarters inflation report was always going to be important in light of the task given to the Bank of England by Chancellor George Osborne in this year's budget speech in March. The prospect of a change of emphasis in Bank of England monetary policy thresholds was always going to be a tricky hurdle to navigate, but it has become even more difficult now that the UK economy is showing significant signs of life and one wrong policy move could well snuff out the current recovery.
This new emphasis on monetary policy could present new governor Mark Carney with a dilemma, and also a bit of a headache with respect to any forward guidance on the UK economy. It's always easier to give guidance on rates when the economy is underperforming, but when it appears that it could be starting to gain traction, being too generous with the timeframe on low rates could well cause new asset bubbles, as well as cause the pound to fall, and in the process keep inflation high.
This could well be a mistake as the last thing the UK needs is a lower pound given its large trade deficit as import costs would rise sharply. With energy prices already set to rise again this winter and average incomes still remaining well below inflation, Mark Carney has a tricky path to navigate today given that a good proportion of some of the growth seen so far has been led by the consumer sector, which still remains highly leveraged.
He will also be very aware of the risks in fuelling another asset bubble in house prices, which are already starting to heat up again due to the governments "help to buy" scheme.
The main question vexing sterling traders over the past few days has been how much upside the pound has left after the July lows at 1.4810, as we look ahead to this morning's press conference. We will soon find out later today.
As for Europe's share markets, comments from two Fed governors last night, including FOMC voting member Chicago Fed Charles Evans, that the Fed is closer to tapering asset purchases saw US markets fall back yesterday, with the result that we can expect to see a lower open for Europe's markets this morning.
EURUSD - the euro continues to remain resilient pushing above 1.3300 ever closer to trend line resistance at 1.3350 from the 1.4940 highs in 2011. Beyond that we also have the 200 week MA at 1.3410. Despite this resilience the downside bias remains, but we need to break below the 1.3150 area and the low two weeks ago at 1.3135 to achieve this. A break through here reopens the risk of a move towards the trifecta of supports at the 50, 100 and 200 day MA above 1.3050. Only above the 200 week MA at 1.3410 suggests the potential for further gains.
GBPUSD - the pound continues to struggle anywhere near to the recent highs just above the 1.5400 level. This remains a key resistance and obstacle to a move towards 1.5540 and the 200 day MA. Having overcome the 50 and 100 day MA the pound should find support around the 1.5300 area. Back below 1.5300 retargets 1.5170, and then 1.5000. A move below this level re-opens the July lows at 1.4810.
EURGBP - we never even got close to the 0.8580 area rebounding from 0.8620 and pushing back above the 0.8650 area. For now any pullbacks need to stay below the 0.8700 area. We need a break below the 0.8580 level to retarget a move back towards the 0.8520 area.
USDJPY - the US dollar continues to look soft falling below the 98.75/80 area and in the process we look to be falling below the cloud congestion area. This break down suggests the potential for further weakness and a fall below the lows last week at 97.50 could well see further losses towards 96.20. Only above 98.80 argues for a retest of the 99.80 area and trend line resistance at 100.10 from the May highs.
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