Intraday Market Thoughts

BoE Inflation Report Expected to Downgrade UK growth

by Kyle Morrison
Aug 10, 2011 9:18

Bank of England inflation report expected to downgrade UK growth, German CPI could drop back on commodity price falls, Splits on FOMC as policy remains loose as US dollar hits new all time lows against Swiss franc, Chinese imports and exports rise more than expected as trade balance widens. See Ashraf's latest premium trades on GBP & more in the link below. Ashraf will be ON CNBC Europe at 9:40 GMT, 10:40 GMT.

Sterling has fallen quite significantly in the last 24 hours after fears grow that UK growth for Q3 is about to hit stall speed and go into reverse after yesterdays economic data. June industrial production came in flat, below expectations of 0.4%, while manufacturing production slumped 0.4%, below expectations of a gain of 0.2%.

With June trade data also disappointing there are increasing concerns that George Osborne could well miss his fiscal targets for 2011. This weeks rioting in London will also add to fears that Q3 GDP growth could well disappoint as business sentiment suffers while tourists could also stay away. This will continue to play into the hands of the doves on the committee, and Adam Posen especially, who has been calling for further stimulus to the economy for some time now.

Todays Bank of England inflation report is unlikely to improve sentiment with the Bank of England expected to downgrade its 2011 growth forecast, though it appears unlikely that the inflation outlook will change given recent declines in commodity prices.

Despite speculation about further QE it is unlikely to happen in the near term due to the current levels of inflation in the economy, and further sterling weakness which further QE would bring, would only make matters worse by importing further inflation, by way of a weaker pound.

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On the other hand Europes much tighter fiscal policy is expected to see German July CPI remain under control, unchanged at 2.4%, held back by recent falls in oil prices. The recent actions of the ECB in buying Spanish and Italian bonds has seen yields fall and thus underpinning the euro, especially against the US dollar where once again monetary policy remained unchanged.

Yesterdays FOMC meeting saw US policymakers change the language of their statement from extended period to rates will remain low until mid 2013, a policy change that was opposed by three members of the committee. Even so the US dollar sank even further, particularly against the Swiss franc sinking to fresh all time lows.

In signs that the Chinese economy remains in pretty good shape, and external demand remains strong, the July trade balance widened from $27.5bn to $31.5bn, with imports rising more than expected to 22.9% from 19.3% while exports also rose 20.4% from 17.9%. This indicates that despite concern about the global economy and falling demand in the western world, elsewhere demand remains fairly robust.

Gold continues to rise exponentially as safe haven flows drive the yellow metal to new record highs against the US dollar, euro and pound in the last 24 hours.


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