Daily Financial Market Outlook

Daily Forex Fundamentals | Written by Lloyds TSB | Nov 12 08 08:22 GMT |

Overview & economic commentary The BoE quarterly Inflation Report will attract close scrutiny this morning for it should help make it clear whether the Bank will carry on cutting interest rates in December or whether policy can stay on hold after the unprecedented 1.5% reduction last week. It will be pivotal to understand not just how soon the Bank believes that inflation will fall back to the 2% target next year, but what the odds are of CPI undershooting the target in 2009 and/or 2010. This will of course be based on the Bank's latest assumption for economic growth but will also be based on market implied interest rates. The latter are currently pricing in a cut in Base rate to 2% by March. UK unemployment data will also be published this morning and are forecast to show a worsening labour market backdrop, especially in private sector employment. Announcements of job cuts by large and mid-size UK companies are the norm rather than the exception these days and this paints a very bleak outlook for the labour market this winter. Today's figures are forecast to show a rise of 35,000 in the total claimant count in October and a rise in the ILO unemployment rate to 5.8% in September. Euro zone industrial production data for September is also due and is forecast to show a fourth decline in five months. ECB president Trichet is slated to speak after the market close. There are no data releases in the US where the Treasury will be hoping for a repeat of Monday's successful 2yr auction when it sells $20bn in 10yr notes later today. Currency commentary The danger of being exposed to equities in a bear market was exposed yesterday when the lift from the Chinese fiscal stimulus report quickly evaporated, led by falling bank stocks. Buying sterling here for a short term bounce may be a counterintuitive proposition but may well make sense if the BoE reins in expectations that base rates will be cut again in Dec. Frankly, after a 150bps move last week, a follow-up move is not certain, unless we witness another collapse in equity/credit markets or a new slew of dreadful economic data between now and Dec 4th. Having said this, £/$ needs to hold 1.5269 support to stop a pullback towards 1.50. For €/£, resistance runs at 0.8215. Elsewhere, commodity currencies like the C$ and Nok continue to struggle as oil prices slip below $60. The negative credit ratings update on S Africa yesterday also hurt the rand and may keep the currency under pressure as risk appetite fades. £/rand could line up a test 16.0. Major data and events today UK Unemployment (sa, claimant count) (09:30) Sep +31.8k Rate 2.9% Oct (f'cast) +35.0k Rate 2.9% Median +40.0k Range +18.0k:+60.0k UK ILO Unemployment rate (09:30) Aug 5.7% Sep (f'cast) 5.8% Median 5.8% Range 5.7%:6.0% UK Average earnings (3m avg, headline, sa) (09:30) Sep +3.4% Oct (f'cast) +3.4% Median +3.3% Range +3.3%:+3.4% UK Unit wage costs (3m avg, annual, sa) (Sep) (09:30) Aug +2.6% EU-15 industrial production (sa) (10:00) Aug +1.1% Y-O-Y -0.7% Sep (f'cast) -0.6% Y-O-Y -0.3% Median -1.6% Range -2.8%:+0.1% Japan Domestic CGPI (23:50) Sep Y-O-Y +6.8% Oct (f'cast) Y-O-Y +5.0% Median +5.5% Range -1.0%:+6.2% Bank of England publishes November quarterly inflation report (10:30) ECB members Mersch and Stark speak (16:00) US Fed member Stern speaks (18:00) US Treasury sells $20bn 10-year notes (18:00) ECB President Trichet speaks (19:00) Chart of the day: How the BoE judges the probability that UK CPI will undershoot the 2% target will shape expectations for Base rate in the months ahead Lloyds TSB Bank http://www.lloydstsbfinancialmarkets.com Disclaimer: Any documentation, reports, correspondence or other material or information in whatever form be it electronic, textual or otherwise is based on sources believed to be reliable, however neither the Bank nor its directors, officers or employees warrant accuracy, completeness or otherwise, or accept responsibility for any error, omission or other inaccuracy, or for any consequences arising from any reliance upon such information. 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