BOE Inflation Report Paints A Grim Picture For The UK

There are few things that we can say with confidence when it comes to FX markets, especially when trying to anticipate market movements. However, one that we can more readily predict, is that every time Mervyn King takes to the stand, GBP dies a little inside and yesterday was no different. GBP dropped as he entered the room, perhaps the markets didn’t care for his choice of tie.

Having watched the press conference, one thing I did notice was the choice of language used to describe the UK’s outlook. The use of words like sustained, persistent, subdued were all used in reference to low and negative growth. While in the past we have had to listen to politicians/economists throw in their two cents as to the state of the economy, there was a real sense of prolonged pain and deterioration.

He stood behind the validity and effectiveness of the QE programme, confirming that it was still the weapon of choice. He was clear to point out that the success of QE was down to timing and not quantity. The appreciation of the pound and the unfavourable external environment were the main culprits. In a nutshell – the future is grim and the UK isn’t pulling itself out of this hole anytime soon with Q4 contraction now likely. GBPUSD and GBPEUR dropped to a new 11 week and 3 week low respectively.

Minutes from the last Fed meeting were also released yesterday, which highlighted the plans to support its QE programme by extending Operation Twist. As expected the Fed and its monetary tool belt will take a back seat while the fiscal cliff is tackled by the government. Obama gave a speech yesterday stating that the government was making good progress in tackling policy changes.

US retail sales were slightly worse than expected for October due to the hurricane, but little attention will be paid to the decline. US inflation, due today, is likely to rise following in the footsteps of the UK. Jobless claims this afternoon could push USD lower to the low 1.58’s against the pound.

GDP and inflation for the EZ are expected to hold strong this morning, building on the steady GDP figures already released earlier for Spain and Italy.