Analysis / Daily / Finance / forex

Sterling traders eye Inflation Report at 10:30

One Pound
The pound weakened for the first time in five days against the euro before data that economists forecast will show an improvement in the U.K. labour market. Sterling held a three-day gain versus the dollar as investors awaited the Bank of England’s quarterly Inflation Report and the first questions to BOE policy makers since they entered an election-campaign purdah six weeks ago. In this period, data has been mixed with slower economic growth in the first quarter than analysts estimated, while industrial production unexpectedly increased. The U.K. currency surged to the highest level this year against the dollar on yesterday as volatility dropped since the Conservative Party secured an outright majority in Britain’s May 7 election. “The majority government result has clearly surprised the market but it is worth bearing in mind that against the dollar, the pound is riding the crest of the broad greenback weakness wave higher,” said Lee McDarby, executive director of U.K. corporate foreign-exchange sales at Nomura International Plc in London. With recent disappointing growth figures we feel that the Monetary Policy Committee will not be able to send too hawkish a message. The U.K. unemployment rate fell to 5.5 percent in the first quarter, the lowest since 2008, from 5.6 in the three months through February, according to the median estimate of economists in a Bloomberg survey. Annual wage growth excluding bonuses accelerated to 2.1 percent in the same period from 1.8 percent. With inflation at zero, British workers are enjoying the most sustained real-pay growth since the global financial crisis. The central bank is scheduled to release its Inflation Report at 10:30 a.m. in London, which will include economic growth and inflation projections that policy makers use to help inform their view on future borrowing costs. It will be followed by a press conference led by BOE Governor Mark Carney.

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France’s economy beat expectations in the first quarter, expanding at the fastest pace in nearly two years, as falling inflation boosted consumer spending.  But the 0.6 per cent quarterly growth – a sharp rise from stagnation in the fourth quarter – contrasted with Germany where gross domestic product in the quarter slowed to 0.3 per cent from 0.7 per cent. This was far below consensus estimates for 0.5 per cent growth. The slowdown could raise doubts about the recent wave of optimism about Europe’s largest economy, which has seen the government lift its 2015 growth forecast to 1.8 per cent from 1.5 per cent earlier and private sector economists raise their targets to 2 per cent and higher. The figures precede data for the whole of the eurozone, due out at 10am UK time. Consensus estimates are for 0.4 per cent growth. The euro was trading 0.4 per cent higher at $1.1257 after the figures were released. French consumer spending advanced 0.8 per cent, from 0.1 per cent as households bought 1.4 per cent more manufactured goods, including cars, according to data released by Insee, the statistical agency today. The figures will provide some respite to French policy makers. They underline rising consumer confidence in the eurozone’s second largest economy, which has benefited from cheaper energy prices, a lower euro and low interest rates.

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The major pair Euro/Dollar hit higher this morning supported by increases in euro zone bond yields and upbeat euro zone data, while the dollar slipped lower ahead of U.S. economic reports later in the day. The single currency remained supported following a fresh selloff in global bond markets on Tuesday. German 10-year bund yields surged, narrowing the gap with their U.S. counterparts. The dollar weakened against the other major currencies ahead of U.S. data on retail sales later in the day, after recent economic reports pointed to weakness in first quarter growth. USD/JPY was steady at 119.89, while USD/CHF was down 0.36% to 0.9259. The U.S. dollar index, which measures the greenback’s strength against a trade-weighted basket of six major currencies, was down 0.27% to 94.45, holding above last week’s two-month trough of 93.96

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