If yesterday’s Bank of England minutes and inflation report told us anything it was that the central bank remains committed to the prospect of raising rates sometime in the future, the only unknown being around the timing of such a move. The fact that we only got one dissenter and not two as originally anticipated also suggested that the on the balance of probabilities Martin Weale, who had been expected to dissent, also had concerns about the sharp declines seen in commodity prices since May. Judging by the number of mentions and oil and energy in yesterday’s quarterly outlook it is clear that the central bank has concerns about the effects that the decline in commodity prices is having on the outlook for inflation, now and into the rest of the year, as it revised its 2015 inflation outlook down to 0.9%. The adjustments to the latest forecasts also saw GDP and wages growth revised higher, partially reversing the downgrades seen to both in the May inflation report, but the inflation outlook for 2015 was revised lower, meaning that a rate rise before November and the next inflation report remains highly unlikely. While yesterday’s Bank of England press conference had distinctly dovish undertones, as Governor Carney suggested that further dips into deflation couldn’t be ruled out, the overarching narrative of a rate rise sometime next year remained intact. Expectations about a possible Fed move on rates in September have been building since last week’s FOMC meeting and US GDP revisions, and if anything this week’s US data has served to reinforce this particular narrative, though here, as in the UK, the narrative is anything but clear cut. Indeed the debate about a rate rise could well develop along similar lines as the Bank of England, the only difference being that the Fed does seem to be in a hurry to get the first rate hike in, before the beginning of next year, given the looming proximity of the Presidential elections, just over a year from now. This week’s interventions by Fed officials Lockhart and Powell have merely served to heighten the debate as has the divergent nature of the economic data, which was illustrated by the latest US ISM Non-Manufacturing index hitting its highest level since 2005, with the employment component showing a similarly sharp rise as well. Most people focused their attention on last week’s Fed statement where it was stated that it wanted to see "some" further evidence of a healthy labour market, and here there does seem to be grounds for optimism, the low participation rate notwithstanding. The problem, as I have previously stated is that less attention has been given to the omission of the paragraph about the stabilisation in energy prices, which was in the April statement, and missing from the July one. Since May in US dollar terms commodity prices have fallen on average by 13% and oil prices by 26%, which is likely to have significant trickle down effects into the end of the year. Factor in the fact that the UN’s food price index has fallen to its lowest levels since 2009, led by dairy products and vegetable oils and along with the fact that, the US dollar index has gained 20% in the last 12 months, you have a recipe for a distinct disinflationary environment. A Fed rate rise could well exacerbate that even further, in the process pushing the US dollar even higher. So while attention is likely to be centred around todays US employment report, the fact that US oil prices remain as weak as they are could well mitigate any reaction to a positive non-farm payrolls report. Expectations are for 225k new jobs to be added in July and the unemployment rate to come in at 5.3%, but also keep an eye on the average hourly earnings data after last month’s surprise fall from 2.3% to 2%. There is an expectation that this number could see a recovery with a 0.2% rise on the month and a move back to 2.3%, but don’t count on it given the recent slide in the Q2 ECI last week to 0.2% its smallest increase on record. EURUSD – the euro continues to be range bound with an upper boundary just above 1.1100 and support down near 1.0800. A move through 1.1030 is needed to retarget last week’s high while a move below 1.0800 could well signal a move towards 1.0600. GBPUSD – yesterday’s drop below 1.5500 has shifted the prospects of a deeper move towards the 200 day MA at 1.5400, but we still remain within the broader range of 1.5400/1.5700. The 1.5680 level remains a key resistance on the upside after another failed attempt last week. A move above 1.5700 has the potential to retarget the 1.5820 level. EURGBP – the move to 0.6950 yesterday prompted a sharp reversal but we need to get back above the 0.7030 area to argue a retest of the 0.7120 area. The 0.6930 lows remain the key obstacle to further losses towards 0.6830. USDJPY – the break above 124.50 yesterday opens up the prospect of another run at the 125.85 highs, and potentially even on to 127.20. The 124.50 level should now act as a bit of a base, but a move back below it opens up a retest of the 123.75 level and then 123.00. CMC Markets is an execution only service provider. The material (whether or not it states any opinions) is for general information purposes only, and does not take into account your personal circumstances or objectives. Nothing in this material is (or should be considered to be) financial, investment or other advice on which reliance should be placed. 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