The Bank of England Announced a New Strategy of Monetary Policy

August 8, 2013

The US dollar continued being traded downwards on Thursday against almost all major currencies amid the yen growth and the release of euro-zone strong macroeconomic indicators which show the signs of economic improvement. After 4-day decrease the dollar dropped according to the dollar index to its low since June, 20. There were no any significant US statistics data on Wednesday. The president of the Federal Reserve Bank of Cleveland Sandra Pianalto marked in her speech that there happened a significant improvement at the labor market and in case of its further recovery, they were ready to start QE tapering off but when it would happen, she didn’t specify.

The euro was supported after the release of German positive data which considerably exceeded the forecasts. German industrial output growth rate in June turned out the highest since April, 2012 – 2.4% m/m with the forecasted growth only by 0.3%. At an annual rate the reading has grown by 2% with the forecasted drop by 0.3%. Besides, Fitch affirmed Germany’s AAA rating with a stable outlook and raised GDP growth outlook to 1.5% in 2014 from 0.4% in 2013. Fitch declared that German government had beaten some budget targets with structural budget balance having moved into surplus this year for the first time since reunification.

The pound grew on Wednesday after the release of the BoE Inflation Report where the Bank of England provided a Forward Guidance for the monetary policy in the form of unemployment threshold. The Bank governor Mark Carney announced that the British CB had no intention to raise a base rate until unemployment rate fell lower 7% - and it is unlikely to happen before early 2016. The Bank of England expects inflation to slow down to the target level of 2% by the 4th quarter of 2015.

However, Mark Carney noted that price stability was in priority for the CB: if the growth rate of consumer prices exceeded the target level by more than 0.5% in the nearest 1.5-2 years, the bank’s promise about the rate wouldn’t not be in force. At first the pound reacted with a decrease but then it rocketed after the outlook for country’s economy growth for the nearest years had been raised. The CB raised the UK GDP growth outlook for 2013 up to 1.5% from 1.2% expected in May and the forecast for 2014 – up to 2.7% from 1.9%. 

The yen strengthened significantly and reached 6-week high Vs the dollar after 4-day rise – before the announcement of the BoJ meeting results on Thursday and amid the decrease of Japanese stock market which slumped according to Nikkei 225 by 4% at once on Wednesday.

New Zealand dollar continued recovering having almost no reaction on employment report which turned out within expectations though unemployment rate in the second quarter rose by 0.2% to 6.4%. The scandal concerning the quality of dairy products gradually fades.  

The Canadian dollar dropped on Wednesday amid the release of negative statistics. Building Permits in Canada dropped in June for the first time for the last six months by 10.3% which has exceeded the expectations by more than 8 times. Ivey PMI moved to a negative territory in July and dropped to 48.4 from 55.3 in June.

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