Markets Take QIR As Non-Event

The much anticipated Bank of England quarterly inflation report saw marginal upward revisions to the growth forecast (to 0.5% this quarter) whilst the inflation outlook was revised marginally lower. We saw very little market reaction, on the initial announcements with very minor sterling strength fading as little further information was released. In actual fact, there may be more importance to these revisions. Previous inflation reports have seen inflation forecasts revised higher and growth lower, so even though the magnitude of the changes are small, this may signal a change in the bank’s perception of the impact on the economy resulting from the monetary and fiscal policy stimulus, suggesting that the requirement for further stimulus might be reduced.

The data yesterday showed a mixed picture with a fall in the claimant count by 7300 and the unemployment rate to 7.8% providing further signs that the economy is improving. On the other hand the squeeze on real earnings and living standards continues with average earnings falling in March. The sentiment towards sterling remains relatively positive despite GBP/USD’s recent decline, which has been largely due to USD outperformance, as opposed to GBP weakness.

Eurozone Q1 GDP was softer than expected which weighed on the EUR yesterday. Within Europe, data continues to signal a lack of growth, though the French appear to have narrowly avoided a triple dip recession (with previous revisions). The on-going Eurozone recession which has now extended to six quarters highlights the difficulties face by the group of divergent economies. This is likely to throw up further tensions over the course of the year, as we have seen from the recent finance ministers meeting to discuss bank ‘bail-in’ plans. Eurozone inflation numbers today is the only data.

Despite weaker than expected April PPI numbers (-0.7% vs -0.3%), the US economy is recovering more strongly than the UK and Europe, and this does suggest that the USD should outperform. We are currently shifting from USD being a risk off and funding currency, back to fundamentals, with the US dollar now more likely to appreciate on stronger US data and increasing expectations of normalisations of interest rates. There is a full data calendar with inflation, manufacturing, jobless claims and housing starts likely to provide a further steer on whether the recent US dollar strength is justified.