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FX Headlines: Pound at Risk for Significant Decline amid BoE's Inflation Report

FX Headlines: Pound at Risk for Significant Decline amid BoE's Inflation Report

2013-08-07 07:10:00
Christopher Vecchio, CFA, Senior Strategist


FX_Headlines_Pound_at_Risk_for_Significant_Decline_amid_BoEs_Inflation_Report_body_Picture_1.png, FX Headlines: Pound at Risk for Significant Decline amid BoE's Inflation Report

European data has been on an upswing the past two months, and the climb above 50 in the German PMI Manufacturing gauge suggests that Industrial Production should be bolstered as well. However, the PMI Manufacturing gauge dipped to 48.6 from 49.4 in May, so the improvement might now be seen yet.

As such, we are looking to see the incoming German Industrial Production data to show a modest decrease in the rate of contraction, and going forward, will be looking for signs of modest expansion. The data suggests expanding economic activity in the Euro-Zone midyear, which should be supportive for the Euro.


FX_Headlines_Pound_at_Risk_for_Significant_Decline_amid_BoEs_Inflation_Report_body_x0000_i1028.png, FX Headlines: Pound at Risk for Significant Decline amid BoE's Inflation Report

The British Pound is up just over one-third of a percent against the US Dollar this week, despite a swath of stronger than expected economic data that has greatly diminished the short-term need for more stimulus from the Bank of England. However, as was made clear by Governor Mark Carney on Thursday, the central bank’s new “forward guidance” policy would be set forth alongside the pertinent Quarterly Inflation Report, set to be released tomorrow.

At the July meeting, forward guidance was announced to reflect the BoE’s intent to keep rates pointed towards zero for the next several years.

The reaction in the Sterling was quite negative (July 4 and 5); indeed, we are biased towards a bearish reaction by the British Pound so long as explicit economic targets are laid out to determine monetary policy guidance. In the case of the BoE, the more vague Governor Carney, the more bullish for the British Pound.

Read more: Sterling Continues to Outshine on PMI Upswing


FX_Headlines_Pound_at_Risk_for_Significant_Decline_amid_BoEs_Inflation_Report_body_x0000_i1029.png, FX Headlines: Pound at Risk for Significant Decline amid BoE's Inflation Report

Swiss economic data kicks off the day and similar to its European countparts, and improvements are generally expected. The SECO Consumer Confidence report for July is due at its highest level since the April 2011 reporting period (the report is released once every three months starting in January).

More importantly, July inflation data points to continued modest deflation in the near-term, though it is possible that the yearly print remains above the inflation/deflation barrier. So long as inflation is nonexistent, the Swiss National Bank has plenty of reason to keep the EURCHF floor in place, so there might not be much of a reaction seen here.

See the DailyFX Economic Calendar for a full list, timetable, and consensus forecasts for upcoming economic indicators. Want the forecasts to appear right on your charts? Download the DailyFX News App.

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--- Written by Christopher Vecchio, Currency Analyst

To contact Christopher Vecchio, e-mail cvecchio@dailyfx.com

Follow him on Twitter at @CVecchioFX

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