Forex: Pound May Rise as BOE Inflation Report Disappoints Doves

Talking Points:

Pound May Rebound as BOE Inflation Report Falls Short of Dovish Expectations
Soft UK News-flow Represents BOE Status Quo, Not a Catalyst for More Easing
Yen Higher, Aussie and Kiwi Sold as China’s Third Plenum Outcome Disappoints

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The British Pound edged lower in quiet overnight trade as markets looked ahead to the release of the Bank of England’s Quarterly Inflation Report. The document will help establish where policymakers see the economy heading relative to its forward-guidance framework in the months ahead. UK economic news-flow has increasingly underperformed versus expectations in recent months (according to data from Citigroup). That means traders will be keen to see if the Bank’s rhetoric implies longer-lasting accommodation as the economy limps toward its unemployment rate objective. October’s CPI figures disappointed as expected yesterday, reinforcing dovish policy bets.

Such expectations may be disappointed. The aforementioned trend in UK economic data has meant that the economy has evolved closer in line with the central bank’s outlook than that of the markets since the introduction of the current policy framework. Indeed, the Sterling rallied when the MPC introduced its unemployment and inflation “knockout” thresholds in the summer as investors bet they will be hit faster than officials predicted, forcing an early unwinding of stimulus. Considering the evolution of economic news-flow, this means the onus to adjust is on the markets, not the BOE. As such, Mark Carney and company are likely to stay on course, which may allow the UK unit to recover a bit of ground after yesterday’s blood-letting.

The Japanese Yen advanced on the back of haven demand while the sentiment-linked Australian and New Zealand Dollars declined as stocks sold off in Asian trade. The MSCI Asia Pacific regional benchmark equity index traded down 0.8 percent in a move the newswires chalked up to disappointment following the outcome of China’s Third Plenum. The sit-down was billed as a key turning point in economic policy for the East Asian giant. The results that emerged following the meeting proved short on actionable proposals, with officials delivering vague slogans extolling reform rather than specifying precisely what course of action they intended to pursue.

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