Cable Rally Capped at 1.60 As BoE Maintains Dovish Stance

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Market Drivers for November 13, 2013
Lew calls for clarity from China
UK Claimant count improves -41K vs. -33K, Carney unemployment threshold reached sooner
Nikkei -0.15% Europe -0.36%
Oil $93/bbl
Gold $1275/oz.

Europe and Asia:
JPY Core Machinery Orders -2.1% vs. -1.8%
AUD Wage Price Index 0.5% vs. 0.8%
GBP Claimant Count -41K vs. -33K
GBP Inflation report
EUR Industrial Production -0.5% vs. -.2% eyed

North America:
No Data today

Cable soared but then backed off the highs in the aftermath of the Bank of England Inflation report which suggested that the UK economy may reach the bank’s 7% threshold unemployment much sooner than originally forecast. Cable jumped to a high of 1.6000 in reaction to the revised projections from the BoE, but then trailed off towards the 1.5950 level as MPC officials continued to dampen any expectations of policy tightening.

Governor Carney and the rest of the MPC authorities were quick to note that despite the much better than expected improvement in labor market conditions, interest rate will remain low for the foreseeable future. Earlier this year the BOE had expected the unemployment rate to reach 7% no sooner than 2016. However, given the fact that UK is seeing the fastest growth in the G-7 universe, the latest estimate suggests that the 7% target may be reached as early as 2014.

However, Governor Carney emphasized the point that even if the unemployment threshold is achieved much faster than originally projected, the BoE will not move on rates especially if it determines that the UK economy continues to see a slack productivity and output gap. Mr. Carney also stressed the fact that the recent decline in inflation allows MPC policymakers more time to keep rate low which in turn may help boost growth for UK economy going forward.

In short, the message from the BoE was crystal clear – despite better than expected growth UK monetary policy will remain accomodative for the foreseeable future and forward guidance remains unchanged. The tempering of expectations put a cap on cable rally as the pair back off the highs and settled near the 1.5950 level. Yet if UK economic data continues to surprise to the upside the upward pressure on sterling is likely to continue and the pair may make another run at the 1.6000 level especially if tomorrow’s UK Retail Sales prove especially strong.

Elsewhere in the markets trading was generally subdued with USD/JPY giving up some of it recent gains after the statement from China’s Plenum proved to be vague and unsatisfactory to investors who were looking for more aggressive measures of reform. The pair probed support around 99.50 and could drift towards 99.00 later today if US equity flows turn negative.

The eco calendar is once again barren in North America and with many currency pairs near their technical resistance points, trading may be choppy for the rest of the day with little fresh news to drive the market.

Boris Schlossberg
Managing Director

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