GBP Continues To Trade To The Downside

The majority of focus on Wednesday surrounded the Bank of England (BoE) Minutes release, where a more dovish than expected Monetary Policy Committee (MPC) sent the Cable tumbling by close to 100 pips. The language used by the MPC painted an uninviting economic outlook, which will weaken investor attraction to the GBP. The MPC noted signs of a slight loss of economic momentum, weak price pressures and the majority of the MPC feeling premature monetary tightening – such as raising interest rates – would leave the UK economy vulnerable to shocks. Therefore, the expectation for a UK rate rise anytime soon appears to be wishful thinking.

It should be noted the last BoE meeting transpired some time before fears regarding the global economic recovery resurfaced. UK inflation has since moved a substantial distance away from the BoE”s target of 2% with inflation levels currently sitting at a five-year low of 1.2%, and average wage growth below inflation at 0.7%. This means the MPC probably has an even stronger view on weak price pressures now than the last meeting. The UK is also an export economy and when you also consider there is weakening demand from the EU, the UK’s main trading partner (EU), and Chancellor George Osbourne says that EU economic woes pose the largest threat to UK economy, this all points towards the GBP continuing to trade towards the downside.

Later this morning, both the Eurozone Manufacturing and Services PMIs are expected to reinforce fears of the EU facing stagnant growth, meaning investors will once again become encouraged to price in the prospect of future stimulus from the ECB. There was optimism a weaker Euro exchange rate would improve economic data from Europe, but no correlation has been noticed. The stronger than forecast US inflation data should cancel out the impact of those unexpected comments from the Federal Reserve’s James Bullard that the Fed would continue QE if inflation declined, and the EUR/USD risks are now strongly pointing to the downside. Weak PMI data from the EU should lead to the pair extending below 1.26, where support can be found at 1.2574 and 1.2525.

Also today, the latest Initial Jobless Claims are expected to continue to show an improving US labor market. While it is not expected that the jobless claims will surpass last week’s 14-year low, a robust figure should continue to cushion fears from investors that the Fed will unexpectedly continue QE next week. With the EUR/USD looking bearish once again, a consistent employment report from the US this afternoon should provide further momentum for the USD/CHF to advance. Possible USD/CHF resistance can be found at 0.9558 and 0.9570.


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