It is the big day for the UK equity market, as the inflation report by the Bank of England is due this morning which could impact the GBP/USD pair. The report will help Mark Carney, the governor of the Bank of England, in his interest rate decision. GBP is under pressure as market is pricing in that the Bank of England will not raise interest rate this year and the odds of raising them are stacked in favour of next year.
The BOE will focus mainly on the unstable external factors, deteriorating weak wage rise and a slow down in the domestic demand. We think that the BOE does want to see wages increasing more than anything before they increase the interest rate. Traders will also be looking at the forecast for the GDP growth which could have a little dent on it due to the slow down in the housing market however, the bigger impact could come from the sluggish growth in the eurozone. What really has been disappointing for investors when it comes to the domestic demand is, of course, the mortgage approval numbers, which has fallen short of the BOE’s expectations and a strict criteria already in place could keep the pressure lid on. The BOE was expecting the mortgage approvals to bounce back to 75,000 by the end of this year however, traders who want to buy sterling with hope of an increase in the rate were disappointed when the September number came in at 61,000.
It is also expected that the BOE may bring the unemployment rate forecast a little lower, as the unemployment has fallen continuously along with claimant account number. Despite the fact that the unemployment rate has fallen continuously, the participation rate has also fall short of expectations, because the bank was expecting this rate to rise to 64% for the second half of the year, but in reality, this has been much lower. This clearly represents the slack in the economy which Mark carney has previously mentioned, and if we join this with external factors, such as a slow down in the eurozone which is impacting its export numbers, the picture looks a lot more duller for any odds of increasing the interest rate.
Finally, we do think that the falling commodity prices are also going to make their impact on the CPI inflation forecast by the Bank of England. Perhaps, this number could be revised down substantially given where the price of oil is. Therefore, to sum all this up, we are expecting the November inflation report to bring not so many good news if you are a bull and wants to buy the GBP/USD pair.
Disclaimer: The above is for informational purposes only and NOT to be construed as specific trading advice. responsibility for trade decisions is solely with the reader.