The BoE's quarterly inflation report, released yesterday, was expected to leave expectations for GDP in 2009 roughly unchanged, while at the same time disagreeing with the Chancellor's predictions for GDP recovery in 2010, but this wasn't expected to make much difference to the markets as no-one believes the Chancellor's predictions anyway. However the report did move the market as Governor King not only produced a more pessimistic view of the recovery next year, but also repeatedly emphasised how uncertain any predictions for the recovery are due to the singular nature of the current recession. There is nothing the market's hate more than uncertainty, but the one thing they did extract from King's testimony is that interest rates will not be rising quite as fast as expected, and are likely to remain at low levels for longer than many people previously thought. The recent optimistic economic releases gave the Pound some support and stopped it falling drastically, but it has still slipped down to around 1.1150 against the single currency, and to around 1.51 against the Dollar.
The UK wasn't the only country to publish pessimistic data, Eurozone industrial production fell twice as fast as expected in March (down 2% rather than expectations of 1%), and US retail sales have also taken a dip, falling 0.4% when the forecast was for them to remain the same. The pessimistic tone took the S&P500 down 2.69% in a third consecutive day of falls, erasing all the gains made last week in the wake of the better than expected results from the stress test of the US banks. The Dollar was given a boost by the increase in risk aversion, pushing the Euro down below 1.36, while the decrease in risk appetite has also hurt the Australian Dollar, causing it to fall to around 0.75 against the USD, and allowing the Pound to climb back above 2.01.
The markets get a day to mull over the BoE inflation report with no new data to interrupt their meditations, the next important release this side of the Atlantic is tomorrow's German GDP figure which is likely to show just how bad things are over on the European mainland. This afternoon the US has the Producer Price Index, which is expected to show a rise for April, although the annual rate is still likely to slip backwards showing inflation pressures continuing to abate.
In the absence of any new data the currency markets are likely to stay rangebound, with any moves likely to come from changes in the equity markets.
Michael Corcoran | Treasury Solutions Partner | Wholesale Banking | NAB