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USD Dives As GBPUSD Reaches $1.5500 After The BoE Inflation Report

USD Dives As GBPUSD Reaches $1.5500 After The BoE Inflation Report

Kevin Jin,

THE TAKEAWAY: Bank of England Inflation Report ties low interest rates to 7% unemployment threshold with 2.5% inflation “knockout” > GBPUSD surges past $1.5500 > USDJPY falls to its lowest level since June 20

After the recent lull in FX volatility, several pairs broke out. The most noteworthy advance was in the GBPUSD, which exhibited a tremendous range following the Bank of England Inflation Report. The Inflation Report also tied in an outlook on forward guidance. The BoE stated that interest rates would remain low while the unemployment rate is above 7.0% and long as medium term inflation (18-24 months) does not exceed 2.5%. While the recent June inflation reading is 2.9%, the BoE expects 4Q’2014 inflation to be 2.4% and 4Q’2015 inflation to be 2.0% (source: Inflation Report pg. 47).

The initial reaction in the GBPUSD is very intriguing. The pair initially broke about -90 pips lower to $1.5204 before sharply reversing. The BoE estimates that it will not reach 7% unemployment until at least 3Q’2016, indicating easy policy for much longer. However the “knockout” condition of inflation being above 2.5% in the next 18-24 months caused market skepticism. Investors point to the BoE’s tendency to underestimate inflation (view comment here). An earlier rate hike due to the inflation “knockout” would be theoretically bullish for the GBP due to a tightening in money supply. Subsequently, the GBPUSD bounced over +300 pips off its lows since the Inflation Report.

Global equity markets are strongly lower today with the Nikkei severely lower: S&P -0.56%; Euro Stoxx +0.13%; FTSE -1.41%; Nikkei -4.00%; Hang Seng -1.53% at the time of writing.

Bond markets seemed to be less reactive although Swiss government bonds are noticeably bullish after Switzerland reported that prices did not deflate y/y for the first time since September 2011: CPI 0.0% July actual; -0.1% Bloomberg News survey expected. 10YR government bond yields trade as follows: US -2.3bps (-0.87%) to 2.620%; Germany -1.5bps (-0.88%) to 1.686%; Switzerland -7.3bps (-7.17%) to 0.945%; Japan -3.2bps (-4.11%) to 0.746% at the time of writing.

The Dow Jones FXCM Dollar Index (Ticker: USDOLLAR) falls -56 (-0.51%) to $10719 at the time of writing. The Dollar Index is at its lowest level since July 29.

AUDUSD 15-minute Chart: August 7, 2013

USD_Dives_As_GBPUSD_Reaches_1.5500_After_The_BoE_Inflation_Report_body_Picture_4.png, USD Dives As GBPUSD Reaches $1.5500 After The BoE Inflation Report

Charts Created using Marketscopeprepared by Kevin Jin

The AUDUSD is modestly up +0.30% at the time of writing. The pair again reaches $0.9000 for the second straight day, a level that it has been unable to close above since July 30. Most of the AUDUSD gains occurred shortly after New York Open.

GBPUSD 15-minute Chart: August 7, 2013

USD_Dives_As_GBPUSD_Reaches_1.5500_After_The_BoE_Inflation_Report_body_Picture_3.png, USD Dives As GBPUSD Reaches $1.5500 After The BoE Inflation Report

Charts Created using Marketscopeprepared by Kevin Jin

The GBPUSD is sharply higher by +1.02% at the time of writing. Most of these moves occurred after the Inflation Report as previously stated. The GBPUSD reached its highest level since June 19.

EURUSD 15-minute Chart: August 7, 2013

USD_Dives_As_GBPUSD_Reaches_1.5500_After_The_BoE_Inflation_Report_body_Picture_2.png, USD Dives As GBPUSD Reaches $1.5500 After The BoE Inflation Report

Charts Created using Marketscopeprepared by Kevin Jin

The EURUSD is slightly higher by +0.17% at the time of writing. The pair moved sharply higher at 6:00 GMT, taking the pair past $1.3300.

USDJPY 15-minute Chart: August 7, 2013

USD_Dives_As_GBPUSD_Reaches_1.5500_After_The_BoE_Inflation_Report_body_Picture_1.png, USD Dives As GBPUSD Reaches $1.5500 After The BoE Inflation Report

Charts Created using Marketscopeprepared by Kevin Jin

The USDJPY is down by -1.12% at the time of writing, the largest decline out of any major FX pair today. The pair was lower throughout Asian trading and continued its next leg of declines at New York Open.

--- Written by Kevin Jin, DailyFX Research

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