GBP Recovers After BoE Inflation Letter

GBP rises after inflation report; Swiss consumer climate falls; German trade surplus rose but industrial production declined; German auction and Spanish yield. Market turns to non farm productivity and unit labor costs.

The greenback lost most of its recent gains and trades slightly weaker against most majors except EUR and CHF. European equities are losing around 0.5% and the relative strength winner is GBP.

GBP was soft ahead of the BOE inflation report drifting to 1.5575. The report reiterated unusually uncertain outlook and cut growth and inflation forecasts. The BOE sees 2012 growth under 1% and over 2% by the end of 2013 while inflation should be below target from mid 2013 through mid 2015. The GBP rose after governor King said that a rate cut would be counter productive and would not significantly improve the economy. GBPUSD jumped to 1.5665 and EURGBP fell to 0.7890.

On the data front, Swiss SECO consumer climate declined further to -17 in July from -8, German trade surplus rose in June to EUR 19.9 bln from previous 15.6 bln but industrial production declined 0.9% in June from previous 1.7%.

Germany did not reach a full target as it allotted only EUR 3.4 bln of its 10 year bond vs. EUR 4 bln target. The average yield rose to 1.42% from 1.31% but cover improved to 1.8 from 1.5.

Spanish 10 year yield has been rising again, nearly touching the 7% level. Spain continues to resist a bailout if new conditions are attached and bond buying pledged by the ECB is contingent on the government's request to intervene in the primary market via EFSF/ESM, MNI reports. Spanish industrial production fell 6.3% y/y.

The US data calendar is limited to Q2 non farm productivity that is seen 1.4% higher after falling 0.9% in Q1 and unit labor costs that are expected to decline to 0.5% from 1.3%.

After the end of the NY session at 6:45 pm New Zealand will announce its labor market data. Employment change in Q2 is seen steady at 0.4% q/q and higher at 1.2% from 0.9% y/y. The unemployment rate is anticipated lower at 6.5% from 6.7%.