Caxton FX Weekly Report: All eyes on the BoE

It’s time for the Inflation Report

After taking a slight hit last week, there may be more weakness to come for sterling as the BoE will release their inflation Report. After the unemployment rate unexpectedly dropped to 7.1%, the market has been speculating where forward guidance will go from here. Some analysts believe the central bank will lower the unemployment threshold further. In a speech a few weeks ago BoE Governor Carney said forward guidance will no longer focus solely in unemployment, but rather a broad range of factors. The central bank is also expected to raise its growth forecasts once again, and more importantly we expect Governor Carney to reiterate the fact that there is no need at present to raise interest rate anytime soon.

Any dovish language from the central bank will weigh heavily on the pound. Slack in the economy remains and we expect the Governor will draw some attention to this. With the lack of UK data and the BoE likely to dampen any rate hike expectations, it will be a difficult week ahead for the pound.

Eurozone GDP steps up

In the ECB press conference the central bank claimed they need more information in order to assess the likely path of inflation going forward. This week’s main release will be GDP figures which will provide the central bank with a better indication of where growth is for the Eurozone. The decision to hold off for a month allows the ECB to compile its latest macro-economic projections and for the first time, officials will be looking two years ahead, providing growth and inflation estimates for 2016. The ECB have been investigating a range of policy options, and these projections as well as GDP figures will be crucial when the central bank decide what policy tool is appropriate, as well as and whether or not to take any course of action.

President Draghi will speak on Wednesday ahead of the GDP release and the market will keep their ears peeled in case of any dovish talk. Strong GDP numbers will be key for the euro’s performance this week and could potentially push through support levels driving the GBP/EUR rate below 1.20.

A calmer week ahead for the US dollar

Last week was filled with volatility as investors tried to position on the back of the US non-farm payroll figure. Things are a little more settled for the dollar this week and the main release will be retail sales. The last employment report has displayed a confusing picture as non-farm payrolls were below estimates whilst
unemployment beat expectations. With the dollar in an uncomfortable position as investors struggle to make sense of the employment report, solid numbers should offer the greenback some support.

 The dollar may also benefit at the expense of sterling and the euro. Dovish rhetoric from the BoE could weaken the pound and with dollar buyers waiting in the wings, we expect the greenback to capitalise. Similarly, following the ECB press conference last week, attention is now on Eurozone GDP data. If these numbers disappoint, it would be an excuse for the dollar to drive EURUSD downwards. Fed Chair Janet
Yellen will testify on the Semi-annual Monetary Policy Report before the House Financial Services Committee and the Senate Banking Committee and this could also cause some volatility.

End of week forecast

GBP / EUR	1.1970
GBP / USD	1.6340
EUR / USD	1.3600
GBP / AUD	1.8200

Sasha Nugent

Currency Analyst

Caxton FX