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Pound Slides After Bank Of England Inflation Report

5/16/2012 6:31 AM ET

The pound edged sharply lower against its major rivals on Wednesday after the Bank of England said that the inflation in the U.K. would stay above 2 percent in the next 2 years.

This was in contrast to what the Central Bank and its policymakers had said in April that inflation to fall back to the 2 percent target by the end of this year.

Bank of England policymaker Adam Posen said last month that the Bank of England has 'serious' worries over inflation and the central bank's big concern is core inflation that excludes indirect taxes and energy prices.

Hovering stubbornly above the 2 percent target, inflation rose to 3.5 percent in March driven by higher food and clothing prices. The core inflation figure has been above 3 percent for much of last year.

The BoE said prospects for U.K. growth remain unusually uncertain. Governor Mervyn King said the economy will continue to face headwinds during the forecast period.

According to King, the challenges within the euro area is the single biggest threat to the recovery. King said the path of recovery is likely to be slow and uncertain.

Meanwhile, Jobless claims in the UK fell unexpectedly in April, the latest figures from the Office for National Statistics showed today. However, the fairly encouraging figure was less supportive to the pound.

The claimant count in April was 1.59 million, down 13,700 from the previous month. Economists expected an increase of 5,000. The previous month's change was revised to show a decrease of 5,400 from gain of 3,600 reported earlier. The claimant count rate was unchanged at 4.9 percent. Economists expected an increase to 5 percent.

The unemployment rate during the three months through March fell by 0.2 percentage points from the previous three months to 8.2 percent. Economists had forecast the rate to be at 8.4 percent. The number of unemployed persons totaled 2.63 million in the March quarter, down 45,000 from previous three months.

European stocks are trading lower as the political impasse in Greece deepened Europe's sovereign debt crisis. With European leaders getting ready to survive a Greek exit, investors now turn their focus to other weaker eurozone members like Spain and Italy, which remain at the forefront of the crisis due to rising bond yields.

U.K.'s FTSE 100 Index is currently down 1.02 percent, France's CAC 40 is trading lower at 0.15 percent and Germany's DAX is currently down 1.03 percent.

The pound erased much of Asian session gains against the euro, retracing to above 0.80 around 5:30 am ET from a fresh multi-year high of 0.7952 hit around 2:45 am. The near-term support for the sterling is seen around the 0.8015 level.

The Eurozone trade surplus increased notably to EUR 8.6 billion in March from EUR 2.3 billion in February, Eurostat reported today. The surplus was well above the consensus forecast of EUR 4 billion.

Seasonally adjusted exports fell by 0.9 percent month-on-month, reversing the 2.2 percent increase in February. Likewise, imports dropped 1.1 percent after expanding 3.2 percent.

The eurozone annual inflation for April was confirmed at 2.6 percent, down from 2.7 percent in March, final data from Eurostat showed today. Nonetheless, inflation continues to stay above the European Central Bank's 'below, but close to 2 percent' target. Monthly inflation was 0.5 percent in April.

Against the Swiss franc, the British currency reached as low as 1.5019 around 5:30 am ET. The pound-franc pair is presently worth 1.5030 with 1.4990 seen as the next likely support level.

Investor confidence in Switzerland deteriorated significantly in May, after improving in the previous month, data from a survey by Credit Suisse and the Center for European Economic Research (ZEW) showed today.

The headline index, which reflects expectations of the surveyed financial market experts regarding Switzerland's economic development in a six-month time horizon, fell to -4 in May from 2.1 in April. In March, the index showed a flat reading.

The pound fell to 1-month lows of 127.73 against the yen and 1.5891 against the dollar after the inflation report. The next likely support levels for the pound-yen and pound-dollar pairs are seen at 127.15 and 1.5860, respectively.

The Japanese yen weakened after data showed Japanese core machinery orders fell for the first time in three months in March. Core machine orders in Japan contracted a seasonally adjusted 2.8 percent on month in March to a value of 746.3 billion yen, the Cabinet Office said today.

The headline figure beat forecasts for a contraction of 3.5 percent following the downwardly revised 2.8 percent increase in February and the 0.7 percent gain in January.

On a yearly basis, core machine orders fell 1.1 percent - well shy of expectations for a gain of 4.4 percent after climbing 8.9 percent in the previous month.

Looking ahead, the US housing starts, building permits and industrial production-all for April and the Federal Reserve's minutes of its monetary policy meeting held on April 24-25 are expected to garner market attention in the New York session.

by RTT Staff Writer

For comments and feedback: editorial@rttnews.com

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