Daily Market Analysis 11/12/2014
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Sterling fell against all its major counterparts today as better-than-expected employment data was countered by a dramatic cut in growth and inflation forecasts.
The Bank of England warned that the inflation rate is likely to fall below 1% within 6 months and that it expects inflation to stay below the 2% target for the next three years. The Bank also cut its growth forecasts due to the slowdown in the European economy. Given this picture of a slowing in the pace of recovery, we believe that the BoE is likely to hold off raising rates ahead of the general election next May, suggesting that rate hike expectations will get pushed back even further, leaving GBP vulnerable.
Earlier, the UK’s unemployment rate remained unchanged at 6.0% in October, its lowest level since September 2008. While unemployment held steady, average weekly earnings including bonuses rose 1.0% yoy, up from +0.7% yoy in August. The figure was above expectations, but despite the acceleration, real wages are still falling as inflation is even higher (1.2% yoy).
GBP/USD plunged following the inflation report and at midday in Europe, the pair is heading towards our 1.5785 support level where a clear breach could trigger further extensions towards the 1.5720 hurdle.
EUR/GBP moved lower following the strong labor data, but bounced back a few pips above our 0.7800 (S1) support line following the dovish inflation report. In my view, as long as the resistance of 0.7915 (R1) holds, the short-term bias remains to the downside. On the other hand, the failure once again to break the first support hurdle creates the possibility for a technical push higher. So we have to wait and see whether the bulls are strong enough to start a new attempt to cross the 0.7915 (R1) resistance level. As for the broader trend, on the daily chart the pair is trading below the longer-term light blue downtrend line (taken from back at the high of the 1st of August 2013), keeping the overall technical picture negative.
• Support: 0.7800 (S1), 0.7765 (S2), 0.7730 (S3).
• Resistance: 0.7915 (R1), 0.7940 (R2), 0.7980 (R3) .
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