Daily Report: BoE inflation report pushes GBP to new yearly low

Bank of England (BoE) Governor Mark Carney left quite an impression on Sterling bulls following the release of the Bank’s Inflation Report on Wednesday, with his less hawkish tone inspiring investors to continue closing GBP positions throughout the day, and leading to the GBPUSD recording a fresh 2014 low at 1.5775. There was speculation that the BoE might downgrade economic projections and cite the economic situation in the EU as the primary reason, but what boosted Sterling bears was the admission from the Bank that UK inflation is set to fall below an annualised 1% within the next six months. If you look at the rapid decline in Brent Oil, which unexpectedly fell below $80 overnight to $79.71, UK inflation could be set to slip towards 1% as early as next Tuesday.

In regards to Brent Oil falling again yesterday, investors were pricing in improved US oil inventories data on Wednesday evening. However, this release missed expectations but Brent Oil continued to drop following comments from the Saudi Arabian Oil Minister, Ali Naimi. Mr Naimi encouraged the markets to speculate that Saudi Arabia would not support a production cut during the OPEC meeting on the 27th November.

Brent Oil also failed to spike following reports that efforts to resurrect El Sharara, Libya’s largest oilfield, were unsuccessful, and reports that NATO spotted Russian tanks and troops entering Ukraine. This just goes to show that fears over an oversupply of oil are weakening the price of Oil, with this not likely to change until the conclusion of the OPEC meeting. If a major oil producer signals it is willing to cut oil production beforehand, it would provide the best chance of consolidating Brent Oil back above $80.

The escalation of geo-political tensions again in Ukraine is having a subdued impact on the currency markets. In the hour following the announcement that NATO had spotted Russian troops entering Ukraine, some increased demand for safe-haven metals such as Gold and Silver was noticed but this was very limited. Gold bounced from $1160 to $1169 on Wednesday but its failure to even challenge the psychological $1180 (which Gold extended below last week) just illustrates that the bears are in control of Gold now.

A similar correlation is being observed in Silver with the metal also finding resistance just below a previously critical support level, $16. Silver is now consolidating around the $15.61 level and, unless there is a sudden sell-off in the US Dollar, it is not expected to appreciate much higher. Instead, support can be found at $15.50 and $15.40.

Meanwhile, there are some indications investors are trying to push the EURUSD price as close to 1.25 before closing positions. This trend was noticed twice on Wednesday, with the pair finding resistance around 1.2485 yesterday morning before the monthly decline in Eurozone Industrial Production sent the pair back to 1.2430. Later yesterday, investors tried their luck again with the pair reaching as high as 1.2470 before concluding trading at 1.2418. Despite this morning’s economic data confirming German prices fell 0.3% in October, the EURUSD once again finds itself moving higher, with the pair currently valued at 1.2460.

There will probably be some caution among investors on Thursday with Friday representing such a critical day of European data. Not only will we learn of the EU inflation rate for October, but also GDP figures around Europe will be released with the most influential being from Germany. There are serious concerns Germany will be announced as having re-entered a recession on Friday morning. This would have a detrimental impact on the European economy as a whole and highly encourage investors to price in further stimulus from the ECB. Another blow to the EU economic sentiment would also strengthen the BoE’s views on EU weakness having a detrimental impact on the UK economy. This could also lead to the GBPUSD continuing to slide down to 1.57.

Written by Jameel Ahmad, Chief Market Analyst at FXTM.

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