11th August, Volatile currency markets

Another hugely volatile day in the markets.

The Bank of England (BoE) published its quarterly Inflation report. It seems committed to its ultra loose monetary policy for at least another 2 years amidst all the global uncertainty. There were few changes in the report’s tone even with inflation in the UK more than double the official target of 2%. Current headline inflation is at 4.2% and it is expected to move close to 5% before losing steam.

The BoE also cut its forecast for UK economic growth this year from 1.8% to 1.4% which hardly helped the pound. The BoE describes the outlook for growth as “highly uncertain”, with the greatest risks to the prospects for global demand coming from the euro zone.

“Domestically, the strength of the recovery will depend on the extent to which households have further to adjust to past falls in their real incomes or to the uncertainty associated with the financial crisis and the fiscal consolidation now in train,” the BoE said.

“It will also depend on whether the desire of companies to initiate deferred projects or to increase capacity in those sectors benefiting from the rebalancing of the economy is sufficient to support a recovery in business investment, against a general backdrop of only modest economic expansion.”

Fears that European debt troubles are spreading took the euro sharply lower in the afternoon after a bright opening. The spotlight turned to France with increasing concern about the country’s banks exposure to euro zone debt. Speculation that France could lose its AAA credit rating did its rounds on Wednesday following Standard & Poor’s US credit rating downgrade last Friday. French finance minister Francois Baroin attempted to reassure the markets saying, “Whatever the impact of global uncertainty, of the announcement of the US downgrade by S&P, the nervousness of markets – regardless of any of these external parameters, we will take the necessary measures to reach our targets” but to little avail.

Societe Generale, BNP Paribas and Credit Agricole were the biggest blue-chip decliners on Wednesday.

The euro eased against the Swiss franc, dollar and yen.

After breaking four straight days of 500+ point losses on Tuesday, the recovery proved to be short-lived for Wall Street as US benchmarks all tumbled over 4% each over renewed concerns over the nation’s economy.

The pound, having benefited from the risk sell off against the high yielders is now coming off as risk sentiment stabilises and economic data in the UK continues to show a sluggish economic recovery.

Commentary by Tony Redondo

“Any opinions expressed in this document are those of TorFX analysts. Any analysis and/or forecasts provided are aimed at helping clients understand market conditions and developing trends. Clients are wholly responsible for their own trading decisions.”