Market Drivers Feb. 13, 2013
Cable pummeled by BOE inflation report, hits fresh yearly lows
Australian consumer confidence improves
Nikkei -1.04% Europe -0.13%
Oil $97.46/bbl
Gold $1648/bbl

Europe and Asia:
AUD Westpac Consumer Sentiment 7.7% vs. 0.6%
CHF PPI -0.1% v. 0.1%
EUR Industrial Production 0.7% vs. 0.3%
GBP Gov King Speaks
GBP BOE Inflation Report

North America:
USD Retail Sales 8:30
USD Core Retail Sales 8:30
USD Business Inventories 10:00

The GBP/USD was pummeled today in morning London trade after the BOE inflation report delivered by the departing Governor Mervyn King suggested that price pressures will likely remain sticky for longer than anticipated while growth will be anemic for the foreseeable future. Cable hit fresh yearly lows if 1.5535 before finally stabilizing as traders dumped the currency on fears that the BOE will have to maintain its accomodative stance and perhaps even increase QE despite the stubbornly high inflation readings.

In his annual address on inflation Mr. King painted a rather dour picture of the conditions in the UK economy noting that CPI will remain above the 2% target rate for quite some time and may even tick up to 3% before receding. GDP meanwhile was projected to reach a rather paltry 1.9% growth in 2 years time and the MPC will maintain its accomodative stance despite the high inflation numbers.

Although Mr. King’s remarks echoed much of the same sentiments of the recent MPC statement, the currency markets nevertheless reacted badly to his comments as they offered no hope of any significant improvement in the UK economy in the near future. Yet even Mr. King admitted that much of the decline in the UK GDP numbers in Q4 was due to contraction in construction rather than a broad weakening in services and manufacturing sectors and he expects that dynamic to improve.

The shorts may continue to press the case and try to push GBP/USD towards the the key 1.5500 level but given the massive selloff that has already occurred in the pair we think there is limited scope for further downside movement from here and the pair could bounce back towards the 1.5600 level as some short covering kicks in.

Elsewhere the Australian dollar continued its strong rebound in Asian and early European trade rising above the 1.0350 level in the wake of much better than expected consumer sentiment data. The Westpac consumer sentiment survey jumped by 7.7% from 0.6% the month prior showing a marked improvement.

The reading in February rose to 108.3 from from 100.6 in January. This was the highest rise in more than two years driven by continued low interest rates and improving conditions in real estate and equity markets. The strong jump in consumer sentiment is a welcome sign for the RBA which has been faced with a slew of recent economic data that suggests that growth Down Under is beginning to slow.

The sharp increase in consumer sentiment however is an indication that the central bank’s accommodative monetary policy may be starting to have a positive impact and could translate into better aggregate demand as the year proceeds.

The Aussie rose to a high of 1.0360 after marking a fresh yearly low of 1.0225 in yesterday’s trade. The recovery in the unit is likely to face stiffer resistance around the the key 1.0400 level, but for now it appears that a short covering rally may have more legs.

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