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European Session – Pound down on less hawkish BoE; euro and dollar broadly steady

The Bank of England’s ‘Super Thursday’ got underway on Thursday as the UK central bank released its quarterly inflation report, MPC decision and meeting minutes simultaneously for the first time. Following recent hawkish comments from BoE governor Mark Carney that the decision to raise interest rates would come into a ‘sharper relief’ by the end of the year, markets had widely interpreted this as a signal that the Bank is getting ready to hike rates.

However, in today’s press conference, Carney clarified that this was his personal opinion that a decision on when to raise interest rates would come in focus towards the end of the year. He later added that the decision would be ‘data dependent’ as recent developments such as sterling’s appreciation and falling oil prices have put downward pressure on UK prices. The main concern for the MPC is wage growth with some members uncomfortable with the small slack in the labor market. But only one member voted to raise rates in August, against expectations that there would be at least two members.

Weaker-than-expected UK industrial production figures underlined the unbalanced nature of the UK economy. Industrial production fell by 0.4% month-on-month in June, against forecasts of a 0.1% rise. A higher-than-expected rise in manufacturing production was not enough to offset the fall in oil & gas production. Manufacturing expanded by 0.2% in June, against estimates of 0.1%.

Earlier in the day, data showed German factory orders bounced back strongly in June, rising by 2% over the month after a 0.2% drop in May.

In the US, initial jobless claims came in below estimates, falling to 270k in the week ending August 1, versus expectations of 272k, though this was higher than the previous week’s 267k. Together with recent data, today’s jobless numbers support the view that the Fed is moving towards raising interest rates in September. All eyes will now be on Friday’s July jobs report which will be one of the key data to come out before the Fed’s September meeting.

In the currency markets, the euro was volatile against the dollar, hitting a high of 1.0943 but later dropping to 1.0873. It managed to rebound to 1.0914 in late European session. The pound also had a volatile session as it dropped sharply after the Bank of England data, having started the day strongly. Sterling managed to bounce back above 1.55 against the dollar after plunging to 1.5466 but could not reclaim the 1.56 handle. It was last trading at 1.5515. Against the euro, the pound dropped back near its day’s lows to around 0.7036 pounds per euro.

The dollar was steady against the yen at 124.77 but off earlier highs of 124.95. The Canadian dollar managed to limit its losses against the greenback despite crude oil prices sliding down again. The dollar edged down to 1.3164 against the loonie in late European trading.

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