Forex Market Review (European Session) – Sterling weak after soft UK data and BOE; yen broadly stronger

Forex Market Review (European Session) – Sterling weak after soft UK data and BOE; yen broadly stronger

The pound fell after the Bank of England announced its latest decision on monetary policy and also released an update of its inflation projections, downgrading longer-term forecasts. The yen was broadly stronger, while the euro dipped further. Gold and oil gained.

Sterling began falling ahead of the BoE decision, after disappointing UK data which showed industrial production fell 0.5% month-on-month in March, reflecting weaker manufacturing, which dropped by a larger-than-expected 0.6% month-on-month, following a 0.3% fall in February. Meanwhile, the UK reported a larger-than-forecast trade deficit of GBP13.4 billion compared to GBP11.6 billion expected.

The weak UK data weighed on the pound but the market’s main focus was on the BoE decision. The no-change in the 0.25% interest rate was expected, as was the Monetary Policy Committee’s vote of 7-1 to keep rates on hold. MPC member Kristin Forbes was the sole dissenter and was in favour of a rate hike. But with no other policy makers joining Forbes, the pound fell to a one-week low of $1.2848. The BoE statement and inflation forecasts were seen as being dovish overall. On inflation, the 2017 forecast was pushed up to 1.9% from a prior estimate of 2% but the 2018 and 2019 forecasts were lowered more than expected. During the post-policy announcement press conference, Governor Mark Carney said that he expected real wages to fall this year.

The euro slipped against the dollar to its weakest level since April 24, touching $1.082. The European Commission published its quarterly economic forecasts today, showing that it lifted its Eurozone growth predictions but downgraded inflation forecasts.

Falling US Treasury yields weighed on the dollar, which dropped below the key 114-yen level to 113.45. Upbeat US data failed to lift the greenback. Initial jobless claims unexpectedly fell further in the week ending May 6, to 236,000 claims from the previous week’s 238,000. It was the lowest figure in four weeks. Forecasts were for an increase to 245,000.  US producer prices rose by 0.5% month-over-month in April, following a 0.1% fall in March and beat market expectations of a 0.2% gain.

Commodities rebounded, with gold rising to $1,227.54 an ounce, while WTI oil extended gains to $48.13 an ounce.

Source: Trade Forex with XM.

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