EUR/GBP Hits Yearly Lows – Will BOE Signal Hike?

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Market Drivers for May 12 2014

NAB Business Confidence 6 vs. 4

EUR/GBP hits yearly lows

Nikkei -.35% Europe .14%

Oil $100/bbl

Gold $1290/oz.

Europe and Asia:

JPY Current Account -0.78T vs. -0.54T

AUD NAB Business Confidence 6 vs. 4

NZD HPI 0.1% vs. 3.4%

JPY Eco Watchers 41.6% vs. 45.2%

North America:

No Data

Its been a very quiet opening night of trade in the currency market with most of the majors holding near levels of the New York close last Friday The one exception in tonight’s trade is the EUR/GBP cross which broke below the 8150 level hitting its lowest point in more than a year.

The drop is EUR/GBP is hardly surprising given the signal from Mr. Draghi last week that the ECB may consider a rate cut at its next meeting in June. As for the pound, expectations are high that the BoE will be the first G-7 central to actually raise rates since the start of the global credit crunch in 2008.

This week the BoE will provide its Quarterly inflation report with Mark Carney facing the press and markets are eager to see if the Governor will signal a more hawkish policy posture given the strong rate of growth in the UK economy. Recent UK economic performance has been much better that the rest of its G-10 peers, although critics have pointed out that unlike US GDP figures UK GDP has yet to surpass it 2007 peak.

Mr. Carney may well make that point suggesting that the output slack in the UK economy remains substantial enough to maintain the ultra accommodative interest rate policy for a while longer. Should the BoE remain dovish cable is likely to see a sharp selloff with EUR/GBP recovering its losses as currency traders adjusting their expectations for interest rate hikes. However, if Mr. Carney suggests that the BoE may commence its interest rate tightening program as early as this year, cable will soar through the 1.7000 level and will likely send EUR/GBP tumbling below the 8100 mark as speculators stock up on sterling.

With no economic data on the North American docket the currency markets could have a quiet lackluster session digesting the volatility from last week, Tomorrow’s US Retail Sales will be the first major data point for the month and if it shows a pick up in consumer demand it could be the catalyst to wake up the dollar from its slumber. Today however, the action is likely to be muted, barring any exogenous events that hit the tape.

Boris Schlossberg
Managing Director

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