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MARKET ANALYSIS 25/11/14

How dovish the BoE really is Bank of England Governor Mark Carney, Deputy Governor for Financial Stability Jon Cunliffe, monetary policy member Kristin Forbes and one of the dissenting voters, Ian McCafferty testify to the Parliament’s Treasury Select Committee over their latest economic forecasts. Given the recent mixed messages on the inflation outlook, investors will be trying to decode how dovish the BoE really is. The November inflation report showed a significant downward revision of the short-term inflation outlook. The BoE members expect inflation rate to fall below 1% within 6 months and to stay below the 2% target for the next three years.

On the other hand, the minutes of the Bank’s November policy meeting, revealed that seven members who voted for the rates to remain on hold had a “material spread of views” on the balance of risks to the UK’s outlook of growth and inflation. While some of those views were focused on the possibility of weaker growth, other MPC members mentioned the potential for slack to be eroded faster than currently expected adding upward pressure on prices. Given these mixed signals by the MPC members, the hearing is likely to elucidate investors on just how dovish the BoE really is. I believe that at today’s inflation report hearing the MPC members will probably sound less dovish than they seemed in the November’s inflation report and will likely give more attention on the positive signs over the UK’s economic outlook. Even though the latest set of macroeconomic projections have pushed the timing for the first rate hike back, probably after the general elections in May, today’s hearing could strengthen GBP somewhat.

Overnight, Bank of Japan released the minutes of its Oct. 31st meeting where the board voted to expand monetary policy easing. The minutes showed that the four BoJ policymakers who opposed to last month easing, did so due to concerns that the further stimulus could hurt the Bank’s credibility and considered that it was appropriate to maintain the guidance for money market operations as before. On the contrary, Governor Haruhiko Kuroda stressed the Bank’s readiness for further stimulus to meet its inflation target, which is likely to keep JPY vulnerable.

Elsewhere, the NZD fell after the 2 year inflation expectation drop to 2.06% in Q4 from 2.23% in Q3, its lowest level since June 2013. This pushed kiwi down as it shows no urgency for the Reserve Bank of New Zealand to raise rates. Falling price expectations add to the already poor inflation outlook and will likely keep the NZD under selling pressure.

In Germany, the final Q3 GDP data confirmed the preliminary growth figure and showed that the German economy grew 0.1% qoq in Q3 a rebound from -0.1% qoq in Q2. Even though Germany barely avoided slipping into recession, the moderate growth is likely to keep EUR under selling pressure.

Today’s activity:

In Canada, retail sales for September are expected to rebound from the previous month, adding to the recent positive sentiment over the Canadian dollar and the optimistic outlook of the Canadian economy.

In the US, the 2nd estimate of the Q3 GDP is expected to show that the US economy expanded at a slower pace than initially estimated. The 2nd estimate of GDP is expected to rise at a 3.3% qoq SAAR pace, a downward revision from the first estimate of +3.5%qoq SAAR. The 2nd estimate of the core personal consumption index, the Fed’s favorite inflation measure, is forecast to have declined from the Fed’s 2% target. The Federal Housing Finance Agency (FHFA) home price index is forecast to decelerate slightly in September, while S & P/Case-Shiller house price index for the same month is expected to have rebounded from August. The Richmond Fed manufacturing index and the Conference Board leading index both for November are also coming out.

Besides BoE hearing, ECB Governing council member Ewald Nowotny also speaks.

Tuesday, 25 Nov, 2014 / 10:07

Source : http://www.ironfx.com/en/research-and-analysis/fundamental-analysis_25_11_2014

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