Central Bank’s Show Fears Over Growth Prospects

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The dollar has rebounded overnight with Ben Bernanke’s post FOMC decision press conference signaling further stumbling growth in the US. The Fed lowered its 2011 and 2012 growth forecasts with 2011 lowered to 2.7-2.9% from 3.1-3.3% in April. They also revised the unemployment rate projections upwards through 2013 and the policy statement implied that while inflation is now where the Fed want it to be, they expect that to moderate over the course of 2012/13. There were however no hints on the prospects of QE3.

Sterling had a real stinker of a day yesterday after the Bank of England hinted that further quantitative easing would be needed to ensure that the UK economy doesn’t slip back into recession. The MPC are worried about consumer spending and naturally with fears of growth comes the belief that further asset purchases may be needed. The committee was always going to take on a more dovish lean since the departure of arch-hawk Andrew Sentence anyway. We did get a hint of this from Paul Fisher on Tuesday when he said that quantitative easing “is still very much on the table as one of our potential policy actions” and although it may seem strange given food and energy prices are rocketing at the moment but certain members of the MPC are more fearful of deflation that inflation at the moment; that a constantly weak demand picture will keep growth below its averages and expectations.

So the pound slipped and those holding on for a rate increase in August have reappraised their views in light of this. Our forecast landscape remains stable at a Feb 2012 rate rise although some believe that August 2012 is more likely.

It wa a quieter day in Europe yesterday after the hub-bub of the Greek parliamentary confidence vote on Tuesday night but we cannot see the markets allowing the euro to strengthen too much while the austerity vote is still unresolved. There is also a rumour moving through the markets that there is a EUR3.5bn hole in the Greek budget on the revenue side of things. We expect confirmation of this later in the day.

We expect risky assets to remain unloved today as traders digest the details of Bernanke’s speech and after poor data from China overnight. The preliminary Chinese manufacturing PMI for June showed a figure of 50.1, anything over 50.0 is expansion, so the industry is barely growing. The People’s Bank of China have not raised rates for 11 weeks as there are obvious fears over the growth picture in the region; something that may fester over the summer.

European PMIs are the order of the data morning with sovereign CDSs opening poorly suggesting that good news is unlikely.

Indicative Rates Sell Buy
GBPEUR 1.1220 1.1239
GBPUSD 1.6020 1.6038
EURUSD 1.4264 1.4286
GBPJPY 129.00 129.16
GBPAUD 1.5209 1.5234
GBPNZD 1.9649 1.9683
GBPCAD 1.5592 1.5617
NZDUSD 0.8141 0.8161
GBPZAR 10.86 10.91
USDZAR 6.7803 6.8203
GBPPLN 4.4693 4.4917
EURJPY 114.89 115.09

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