Bank of England boost Sterling

Thursday’s trading saw a turbulent and volatile day on the markets with major announcements from around the globe. The day kicked off with Euro-zone Industrial Production figures which posted a 0.2% contraction on the year and fell short of forecasts. The Euro however continued to trade relatively flat after its huge sell off in January.

Next up was the Quarterly Inflation Report from the Bank of England where Mark Carney delivered a very honest but upbeat report on UK inflation and forecasts for the economic recovery. The governor warned that inflation in the UK could in fact turn negative in the Spring as it is dragged down by falling oil prices but fully expect levels to rebound by the end of the year meaning the UK does not face a deflation risk. Typically low inflation is combated by rate cuts however with the current forecast the Bank of England still intend to start increasing the base rate in a gradual and steady manner over the coming years, and likely not beginning until at least early 2016. Mark Carney supported this by saying they have also upgraded the UK’s growth and average earnings forecasts for the year ahead and with unemployment continuing to improve the overall recovery is looking far better than it did 3 months ago.

As lower inflation is seemingly not going to deter the BoE from raising rates then there was no real negative spin on this information from the currency markets. In fact the markets reacted extremely well after hearing of the upgraded forecasts and assessing the positive fact that the gap between wages and the cost of living is set to increase even further in the coming months to the advantage of the consumer, which in turn should boost spending and therefore the economy. GBP/EUR rates rallied back to the high of the last 7 years and GBP/USD broke through some critical resistance levels and pushed rates to the best buying levels so far this year.

The run on cable was boosted by poor Retail Sales figures for the USA in the afternoon, which posted a 0.8% contraction on the month, deeper than the forecast 0.5% contraction. The USD finally seems to be on the back foot with weak data of late and could well come under further selling in the coming weeks and months until US rate hikes come back to the forefront.

Today’s main focus will the Euro-zone GDP figures at 10:00am however no change is excepted so this may not be a big market mover and as long as figures are not worse than this then the Euro should continue is slow recovery against the pound and US Dollar.

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